The effect of the recent financial crises on the UK investors psyche Literature review

The effect of the recent financial crises on the UK investors psyche - Literature review Example Theories are provided to guide the behaviours and investment strategies of the investors. The theories give emphasis on the psyche of the investors and their way of thinking and reacting to the financial market changes. The individual decisions are cognitive while investments are made. The paper also highlights on the risk measurement capacity of the investors. The risk is associated with the changes that are brought in the stock prices by the companies during the crisis period. Key Words: financial behaviour, financial crisis, Investment psyche, decision making Critical Review (Background) It is quite understandable when people ask how the crises could have happened after the disaster had struck, but given that market players are irrational, it can be said that people, including experts and laymen alike, play a psychological role in financial decision making. According to Sahi and Arora (2012) it is hardly ever heard that investors make wrong decisions who buy when they have to sell and vice-versa, despite possessing the correct information. This is in complete non-conformity with the efficient market hypothesis theory, which states that people behave rationally and maximize their utility by accurately processing all the available information. This highlights that prices remain at true values of the stock and reflect all essential information about investment (Phansatana et al., 2013). However, Shiller (2013) argues that the behavioural finance disproves the theory stating that individuals are impacted by more factors than just objective figures, including all kinds of subjective factors like, human biases and inconsistency in behaviour, thought and irrationality, when they are faced by market uncertainties. The paper analyses how the recent financial crisis has supported the idea that investors behave irrationally when faced with the financial meltdown and offers interesting observations on post crisis behaviour of investors. Investigations of the recent fina ncial meltdown in 2007 reveal that the lessons to be learnt are plentiful. The crisis investigations done by (Adrian and Shin, 2009; Taylor, 2008; Greenlaw et al., 2008) give general view of the affairs proceeding the crises and they all to some extent agree it was due to a conglomerate of macroeconomic factors like, interest rates, high market liquidity and booming rates of securities market and household. This market crisis also emphasized on the fact that financial sector was unable to predict risk specifically in US mortgage lending segment (Ferguson, 2013). This is the reason why the communication between financial sector and stakeholders was faulty and that the stakeholders had made investments without proper investigation. Ulkua and Weber (2013) firmly believe when recession occurs at the business cycle it brings in a general slowdown in the economy. A general trend of reduced spending is observed. Governments play their role by adopting policies that have an expansionary imp act on the economy like, increasing supply of money and reducing taxes. As a result of the financial crisis, Mehl (2013) examined that the equity markets had also shown a lot of volatility and this had instilled unpredictability among the investors. Investors rely on the efficient markets and expect rational behaviour, but this efficient market hypothesis had seen anomalies in the recent past. According to