In every market there are some trading or buying anomalies that cannot be explained by financial instruments and theories alone. For this reason the field of behavioral finance was developed. As investors are humans, they sometimes act in according to their instinct rather than strict financial rules, principals or inputs. There have been many events in the last century that do not have a clear financial explanation but rather seem more possibly explained by psychological factors. One of the most recent events that has been witness to this financial anomaly is the “Flash Crash of 2010”. This research will look into the event as well as examine how behavioral finance theories can be used to create a rational explanation to this seemingly irrational event.
Table of Contents
Abstract
Acknowledgement
List of Abbreviations
Chapter 1: Introduction
Structure of the paper
Chapter 2: Literature Review
Behavioral Finance
Major Literature
Status quo bias
Transitory Components
Utility Hypothesis is questioned
Gender as a factor in decision making
Behavior of Individual Investors
Feedback Theories
Two types of Investors: Smart Money Vs. Ordinary Investors
The Need for Behavioral Finance
Events leading up to the crash
Flash Crash 2010: a brief summary
Net Result of Flash Crash
Chapter 3: Research Question and framework
Research questions
Question 1: Which theories explain the Flash Crash?
Question 2: Which Companies?
Question 3: Circuitbreakers
Chapter 4: Research Methodology
Objective of the research
Research Protocol
How research questions were answered?
Strength of association
Materials Used
How materials were prepared
Data Collection
Types of data
Justification of study’s design
Establishing Rigor
Chapter 5: Analysis of Reasons for Flash Crash 2010
Large Directional Betting/Trading
Changes in Market structure resulting in the decentralization of trading
Influence of HFT
Herd Mentality
High frequency traders and their contribution
Order flow Toxicity Metric
Technological Glitches
Chapter 6: Interpretation of Results
Can proposed reasons adequately explain event
How do these possible explanations differ form traditional finance explanations
Chapter 7: Conclusion
Lessons learned
Can financial instruments/regulations prevent future crisis?
Circuit breakers
Recommendations
Future Research
References