IOP3708 ASSIGNMENT 3 SEMESTER 1 2025 BMZ The field of finance has traditionally rested on the assumptions of rational decision-making, efficient information dissemination, and logical price adjustments. However, real-world financial markets often deviate

THE BMZ ACADEMY




THE BMZ ACADEMY




@061 262 1185/068 053 8213




BMZ ACADEMY 061 262 1185/068 053 8213

, THE BMZ ACADEMY


Table of Contents
Introduction ................................................................................................................ 3


QUESTION 1 ............................................................................................................. 3


QUESTION 2 ............................................................................................................. 7


QUESTION 3 ........................................................................................................... 12


Conclusion ............................................................................................................... 15


References ............................................................................................................... 15




BMZ ACADEMY 061 262 1185/068 053 8213

, THE BMZ ACADEMY

Introduction

The field of finance has traditionally rested on the assumptions of rational decision-

making, efficient information dissemination, and logical price adjustments. However,

real-world financial markets often deviate from these ideals, as evidenced by market

bubbles, crashes, and persistent anomalies such as momentum and herding. These

inconsistencies have sparked increasing academic and professional interest in

behavioural finance a discipline that integrates insights from psychology and

sociology to explain investor behaviour and market dynamics more realistically. This

paper examines key behavioural finance concepts through the lens of notable

anomalies. First, it addresses the momentum effect and its contradiction of the

Efficient Market Hypothesis (EMH). It then delves into herding behaviour, analysing

how cognitive biases and social pressures influence group decision-making. Finally,

the paper explores the distinction between risk capacity and risk attitude, crucial

elements in understanding individual risk tolerance. Each section provides theoretical

grounding, critical analysis, and real-world illustrations to reflect how behavioural

insights can enhance financial decision-making and investment management.


QUESTION 1

1.1. Momentum is the anomaly that gives those subscribing to efficient markets the

most trouble. Critically explain this statement. (5 marks)


Momentum refers to the tendency of asset prices to continue moving in the same

direction over short to medium-term horizons. It is considered one of the most

persistent market anomalies, presenting a challenge to the Efficient Market Hypothesis
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