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Induction
The most conventional sense of the market bubble is Dutch Tulip Mania in 1630s. But in fact, the similar things had happened in different countries or different historical stages, for example, the Internet bubble of the late 1990s, and over the past 10 years, the bubble of the real estate market which the dissertation will mainly discuss. In 2008, the bubble of the real estate market triggered banking or financial crisis, this financial crisis began in United State, and soon spread to the world. In the following years, people use the modern classical financial theory to discuss the financial crisis, but it appears to have little effect. The orthodox financial theory is established by two hypotheses, rational man and efficient market hypothesis; however, it is very hard to explain how rational man could make such an irrational problem in the efficient market.
In order to improve the deficiencies of the orthodox finance, many researchers started with the basic assumptions of orthodox finance, relaxed the assumption that the investors are “rational” economic man (made economic man to be incomplete rational man), and absorbed the content of psychology to researches, finally, the theory of behavioral finance has been built. The behavioral finance is a borderline science, which crosses with finance, psychology, ethnology, and sociology, it aims to complete the shortage of orthodox finance and explain the irrational behavior and the rule of decision. This research seeks to analyze the bubble of financial market in 2008 from behavioral finance perspective.
Research Question
1. How could the orthodox finance and the behavioral financial theory explain the phenomenon of financial bubble separately? (you will cover this but it is not your research question)
2. How application of the behavioral financial theory could helps in dealing with the financial bubble problem? (again you will have to look at this but it is not your central research question.)
3. In the behavioral financial perspective, is the financial bubble in 2008 similar to the present situation in China? (I would choose this research question the others are too general. You do need to rewrite this, for example:
3. Is there a real estate market bubble in China?
With these three desk research questions, the research has to be quite comprehensive. Since the finance crisis covers quite a vast geographical region, the method of research has to be well thought out and comprehensive. The research using documentary analysis is the most appropriate method for the study.
As an emerging theory, Behavioral finance’s gravest weakness is lacking of a set of complete mature theory system, however,due to the financial crisis has passed about 5 years, there are more and more research on it, which also meant that the data and theory on the 2008 financial crisis are integrated (this is a big claim- be careful. Just say that you are going to use theory and empirics from recent history and academic literatureto evaluate the behavior of the real estate market in China), it is a golden opportunity to improve the behavioral finance’s influence, with the integrated information of financial crisis, behavioral finance theory has ability to conduct a comprehensive analysis of the financial crisis. (you will need to look at competing views on this)
Literature Review
Say what your literature review is going to do, why you are doing it and how.
The traditional financial economic theory is based on Professor Fama’s work. His contribution to Economics is immense, but he is best known for demonstrating that stock prices are close to a random walk (Fama, 1965, p.15) and for developing the Efficient Market Hypothesis (Fama, 1970. p16).
Fama’s definition of market efficiency is logically intuitive: it means that asset prices in financial markets fully reflect all the available information (Fama, 1970, p.16) and that there are no trading strategies that produce positive, expected, risk adjusted excess returns (Dothan, 2008, p.13).
The Efficient Market Hypothesis seems to be intuitively appealing; however, significant empirical evidence has appeared over the years. The weakest assumption of the theory of efficient market is that it assumes that individual’s are rational. In detail, the EMH does not assume that all investors are ration, but it does assume that markets are rational in the sense that markets make unbiased forecast for the future (for example, in this framework financial bubbles could not exist).
Other than the orthodox finance, behavioral finance is the study of the way in which psychology influences the behavior of market practitioners, both at the individual and group level, and the subsequent effect on markets (Sewell, 2010, p.31). According to Thaler and Barberis (2002, p.36), behavioral finance has two building blocks: limits to arbitrage and psychology. Limits to arbitrage seek to explain the existence of arbitrage opportunities which do not quickly disappear. It is associated with arbitrageurs coexisting with not fully rational investors in the market and themselves not being able to profit from market dislocations.
Understanding the existent of arbitrage opportunities, although theoretically counterintuitive, is not enough to make sharp predictions. Behavioral finance researchers often need to specify the form of the agents’ irrationality. This is related to how they misapply Bayess law or deviate from the Subjective Expected Utility theory. In order to specify the type of irrationality, researchers have turned to experimental evidence complied by cognitive psychologists on the biases that arise when people form beliefs, and on the people’s preferences, or on how they make decisions, given their beliefs (Thaler and Barberis, 2002, p.36).
In this research, we will concentrate on the extensive literature on the Limits to Arbitrage. The reader can refer to Camerer (1995, p.5), Rabin (1998, p.28), Kahneman and Tversky (1982, p21), Kahneman and Tversky (2000, p.22) and Gilovitch, Griffin and Kahneman (2002, p.18) for an excellent and detailed treatment of the psychology behind people’s irrationality types in behavioral finance.
This might prove relevant literature but clearly you need to cover literatureon financial bubbles and indeed wether they exist. I can see your problem in that you are going to use this literature to evaluate China but you can introduce the main arguments and findings here. Clearly this is a very early version of the literature review and is not yet a review. Don’tforget that one purpose of a literature review is to position your research in relation to that literature. What will you add? What will you do the same and what will you do differentely?
Methodology
In this study, we will be adopted on the desk based research. This will be done through documentary analysis. Since the area of study is so vast, it is impossible to effectively collect primary data due to the limitations of time and resources. Therefore, documents on the finance market in the USA and China will be used. These can be used to get all the secondary information that is needed to come up with thorough conclusions. And foe the further research, case study will be essential in the study, the financial crisis in 2008 and the current real estate crisis in China will be the great analytic target.
Again this is obviously incomplete. I would perhaps choose the idea of doing a case study and discuss case study methodology. Remember a methodology chapter will say how you are going to address your research question. Also at the beginning you will need to discuss different approaches to knowledge and research and those approaches that you might have taken. Justify your choice. For example much work might be statistical and econometrioc but based upon simplifying assumptions. You could argue that you want to explore the richness and complexity of the real estate market in China.
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