What Explains the Market : Finance Theories or Psychology?

It's hard not to think of the stock market as a person: it has moods that can turn from irritable to euphoric; it can also react hastily one day and make amends the next. Can psychology really help us understand financial markets? Does it provide us with hands-on strategies for stock selection? Will behavioral finance help investors beat the market?Behavioral finance argues that people are not nearly as rational as traditional finance theory assumes. For investors who are curious about how emotions and biases drive share prices, behavioral finance offers some interesting propositions and explanations. The idea that psychology drives stock market movements disproves in the face of established theories that advocate that markets are efficient. Proponents of efficient market hypothesis say that any new information relevant to a company's value is quickly priced by the market through the process of arbitrage.The internet bubble and the subsequent crash, the sub-prime crises and the meltdown in global stock indices have raised challenges to the efficient market theory. Behaviorists argue that irrational behavior is in commonplace. In this paper, we investigate investor behavior to seek evidence of irrationality among the Indian investors evidence of irrationality detected. Our findings from experimental research suggest that emotions influence investment behavior in Indian stock market