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
BMZ ACADEMY 061 262 1185/068 053 8213Page 3 of 19
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
BMZ ACADEMY 061 262 1185/068 053 8213Page 3 of 19
