Behavioral economics, anomalies and

paradoxes

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 Table of Contents
Introduction.....................................................................................................................................2

Main body........................................................................................................................................3

Concepts of “anomalies” in behavioral economics.........................................................................3

Concepts of “paradoxes” in behavioral economics.........................................................................3

Theories...........................................................................................................................................4

Examples..........................................................................................................................................4

 The Winner’s Curse...............................................................................................................4

Test evidence...................................................................................................................................5

 The January effect.................................................................................................................5

Experimental evidence....................................................................................................................6

Conclusion........................................................................................................................................6

References.......................................................................................................................................7

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Introduction
In economics and finance, the characteristic is that the actual outcome under a given set of
assumptions differs from the normal outcome predicted by the model. Irregularities prove that a
given assumption or model does not hold. The model can be slightly newer or more skilled.
Anomalies are events that deviate from the financial model or predictions of the financial model
and undermine the main assumptions of those models. Patterns that violate the productive market
hypothesis, such as the timing effect, are good representations of market anomalies. Most market
anomalies are psychologically determined. In any case, anomalies usually disappear quickly as
soon as the information is disclosed. Common market anomalies include winner's curse effects
and January effects. The winner's curse refers to the effect, and in both versions the winner is
concerned with the outcome. The January effect refers to the tendency of a stock to return
significantly more in the long term than other stocks in January. Two factors work in opposite
directions in cutting the initial cost. Increasing the number of other bidders means you have to
bid more aggressively to win the package. However, their presence also increases the likelihood
of overestimating the value of items available for purchase, assuming you win. This shows that it
should not be presented too aggressively. Solving an ideal proposal is not easy. This essay will
brief explain the concept of anomalies and paradoxes in economics with the help of examples
(Báčová, 2021).

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Main body
Behavioral economics clearly considers spiritual factors in individual choice. Behavioural
economics (sometimes referred to as behavioural economics) is a branch of economics that
examines the influence of various elements on people's decisions, such as psychological,
cognitive, emotional, cultural, and social aspects. Behavioral economics is a subfield of
economics that uses insights from psychology to better understand how economic decisions are
made. A good number of these discoveries challenge the conventional economic models that are
predicated on rationality by demonstrating how human psychological tendencies influence
economic life and may not always lead to choices that are completely rational. In addition, social
psychology demonstrates how the dynamics of collective groups and the social circumstances in
which decisions are made influence economic outcomes. Behavioral economics is largely
concerned with the limits of rationality of economic agents. Neuroscience, psychology, and
microeconomic theory are often incorporated into behavioural models. The study of market
behaviour and the dynamics that drive public choice is included in behavioural economics.
Different mental aptitudes, deep states, or faulty natural wiring in the human brain are
fundamental motivations for specific behavior that deviates from the usual decisions of game
theory.

Concepts of “anomalies” in behavioral economics

In economics and money, anomalies are points where the actual outcome under a given set of
expectations is not the same as the normal outcome expected by the model. Anomalies prove that
certain estimates or models do not hold, (Grayot, J.D, 2020). The model can generally be new or
more skilled. Anomalies are events that deviate from a financial model or the predictions of a
financial model and interfere with the underlying assumptions of those models.

In addition, Market anomalies and price anomalies are two prominent forms of anomalies that
occur in the world of finance. A deviation from the efficient market hypothesis, often known as
an anomaly in the market, refers to a distortion in the returns (EMH). When something, like a
stock, is valued in a manner that differs from how a model predicts it would be priced, this
phenomenon is known as a pricing anomaly.

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The January effect and the small-cap impact are two examples of market abnormalities that are
rather common. The term "small-cap effect" relates to the "small company effect," which
describes the phenomenon in which smaller companies have a tendency to outperform larger
ones over time. The term "January effect" refers to the tendency of stock market returns to be
much higher in the month of January compared to other months.

Furthermore to this, anomalies frequently take place with regard to asset pricing models, namely
the capital asset pricing model (CAPM). Although it was developed through the application of
novel assumptions and theories, the CAPM has a reputation for producing unreliable forecasts of
stock returns. Those individuals who wanted to discredit the CAPM used the numerous market
abnormalities that were identified following the establishment of the model as the basis for their
argument. In spite of the fact that the model might not hold up in empirical and practical tests, it
nevertheless has some useful applications.

Concepts of “paradoxes” in behavioral economics

This paradox was initially meant to contradict the accepted assessment. In theory, it is usually
more precisely planned. For example, this paradox has to do with chance, which leads us to a
contradiction with correct thinking. In general, financial professionals seem to be close to the
first sense. We can use this fact to ensure that there is a reason to treat the financial analyst's
paradox as a result of embarrassment. As we shall see, there was a descriptive appeal to
"paradox." However, there are a few different examples of riddles, (Claeys et al, 2020).

In addition, a paradox is a logically contradictory remark or a statement that goes against one's
expectations. One that appears to contradict itself or to be incompatible with logic, even though
it is based on apparently sound premises and reasoning. A paradox is characterised by the
simultaneous existence and persistence of elements that appear to be in opposition to one another
yet are actually connected. Their effect is to create an everlasting unity of opposites by creating
"persistent contradiction between interdependent parts."

Many paradoxes in logic are known to be invalid arguments, but they are nevertheless useful in
teaching critical thinking, while some paradoxes have revealed faults in definitions that were
considered to be rigorous and have required axioms of mathematics and logic to be re-examined..
One example is Russell's dilemma, which asks if a "list of all lists that do not contain

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themselves" would include itself and proved that attempts to establish set theory on the
identification of sets with qualities or predicates were faulty, (Krstić, et al, 2020). 

Theories
Behavioral economics (BE) is characterized by examining irregular decisions, or at least
decisions that do not conform to rational decision theory or expected utility theory. Expected
utility theory holds that an informed and highly educated professional (the "financial man")
makes decisions that maximize his normal utility. - For example, raise cash or make decisions
that may change through ad hoc decisions or reevaluations. Studies at two different schools
found that subjects violated reinforcement guidelines. These habits shape the two legs on which
BE stands: behavior and spirit. Between the 1970s and 1980s, these two schools, (Grayot, J.D,
2020).

According to the affective probability theory proposed by De Finetti and adopted by Savage, all
experts have an (incorrect) evaluation of the probability of the opportunity and outcome (eg,
expected utility). This evaluation determines the expert's decision. Errors in the expert's behavior
include violations of his wishes and possible arrangements, which can be due to reasons such as
lack of time, choices under pressure, etc. Another issue, explicitly addressed by Kahneman and
Tversky in the 1970s, was the intentional outcome of insufficient objective thinking, contrary to
what experts in choice theory believed to be ideal. It was about how to make the "wrong" choice.

Examples

 The Winner’s Curse

The winner's curse is an idea first discussed in writing by three Richfield Atlantic engineers. The
idea is simple. Suppose that many oil companies are interested in buying the right to penetrate a
certain parcel of land. We must assume that all bidders are entitled to equal rights. In short, the
sale is known as a normal value package. Furthermore, suppose that each provider receives an
estimate of the value of a right from its expert. We assume that the mean estimates are
comparable to the normal plot value, since the estimates are not biased. Maybe what happens
with a package? Given that it is difficult to estimate the amount of oil in a particular area, expert
estimates vary considerably, some are too high and some are too low. Regardless of whether a
firm bids somewhat below the master price, a firm with a higher master price will often bid more

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than a firm with a lower master estimate. In fact, the company that wins the exchange may be the
company that the experts offer the best price, (Hayes, A.S, 2020).

Test evidence
The model of the above coin holder is directed under the exploratory conditions). Their subject
was a MBA student taking a microeconomics class at Boston University. Purging items were
coin jars or other items such as paper clips that were worth 4 cents each. He does not have the
foggiest idea about the subject, but rather each dish was valued at 8 dollars. The subject
submitted a sealed bid and was educated that the highest bidder would get the thing's
characteristic worth in the wake of deducting their bid. A sum of 48 auctions were held, of which
4 auctions were held in every one of the 12 classes. This bias and risk aversion frequently
counteracts the observation of the winner's curse, (Hayes, A.S, 2020). Economists frequently
respond to such cases by hypothesizing the acquisition of involvement and the association of
traps, in spite of the fact that individuals can be over and over tricked by such problems. Scientist
tested this hypothesis by using a microcomputer to ask numerous students at Northwestern
University a "affirmation of purchase" question. After every single fundamental study, all
subjects rehashed the study twenty times with monetary incentives and criticism. There was no
sign of learning among others. Frankly, ordinary offers have increased in the last couple of
attempts. It very well might be possible to sort out some way to stay away from the winner's
curse in this, yet it is neither easy nor speedy to learn (Van IJzendoorn , 2021)

 The January effect

The stock market is a decent spot to search for anomalies considering many factors. Data about
such markets has increased decisively. Month to month charge data is accessible for stocks listed
on the New York Stock Exchange during the 1920s. It is considered the security market to be the
most productive of all markets. It's difficult to miss the point here because of transaction costs
and other market failures. High level theories of security evaluating, such as the capital asset
estimating model add structure to possible tests, (Claeys et al, 2020).

Experimental evidence
Taxes also seem to be connected with the effects of January, however this is not a total
clarification. First, the January effect is seen in Japan, where there are no capital raising or loss-

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production fees. Second, Canada was not charged for capital gains before 1973, however was
impacted in January. Third, the UK and Australia are impacted by January, yet the monetary year
starts in April and July respectively (there are still high profits in April in the UK and July in
Australia). Taxes are a story.) January is special. In other surprising ways, experts have
discovered that an organization that has been the biggest winner or loser in the North for a five-
year time span has excess returns in the opposite heading. The ex-monster winner has a negative
excess return and the loser has a positive excess return.

Surplus income, especially for losers, accumulates in January. It was examined the CAPM to see
if there is a seasonal pattern in the risk premium, (Krstić, et al, 2020). They made the surprising
finding that the re-observation of high-risk strains (higher β) occurs only in January. Risky
stocks do not combine the rest of the month with other months to earn significant returns. CAPM
is a feature of January. Another surprising seasonal effect is its latest commitment to a series of
articles that examines whether stocks can significantly increase returns by offering high
dividends (for shareholders, by offering dividend taxes). We report two unusual results among
companies that offer positive dividends: dividends actually appear to increase with the rate of
return. In any case, the highest returns are for companies that do not offer dividends.
Additionally, excess returns for both high-margin and zero-profit groups close in January
(Wenski, 2021)

Conclusion
By using creative assumptions and theories, we often get woefully wrong in predicting stock
returns. The numerous market anomalies observed after the CAPM was developed helped lay the
groundwork for those seeking to reject the model. This model may not withstand observable and
executable tests, but it still has some utility. In many cases, abnormalities are not uncommon.
When the anomaly is freely referenced, the anomaly quickly disappears when the arbitrage trader
goes back to look for such a door and removes it.

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References
Claeys et al, 2020. Organizational crisis communication: Suboptimal crisis response selection
decisions and behavioral economics. Communication Theory, 30(3), pp. pp.290-309.

Grayot, J.D, 2020. Dual process theories in behavioral economics and neuroeconomics: a critical
review. Review of Philosophy and Psychology, 11(1), pp. pp.105-136.

Hayes, A.S, 2020. The behavioral economics of Pierre Bourdieu. Sociological Theory, 38(1), pp.
pp.16-35.

Krstić, et al, 2020. Behavioral Economics: New Dimension in Understanding the Real Economic
Behavior. In Handbook of Research on Sustainable Supply Chain Management for the Global
Economy (pp. 281-298). IGI Global.

Báčová, A., 2021. Princip závazku a konzistence chování.

Van IJzendoorn, M.H. and Bakermans-Kranenburg, M.J., 2021. Replication crisis lost in
translation? On translational caution and premature applications of attachment
theory. Attachment & human development, 23(4), pp.422-437.

Wenski, G., Das kleine Handbuch kognitiver Irrtümer.