A MCDM and Behavioural Finance Approach to Investment Decision Support

Han Qinfei

Abstract

The financial markets in today’s world are evolving faster than expected. The traditional finance paradigm is evolving, contributed by the globalization processes, the intensification of competition and the rapid social and technological changes. The importance of financial decision making and the complexity of the process have increased vastly under such increasingly uncertain market environment. A well-established financial decision making tool helping people to make informed decisions in this new finance world is more than necessary. In this Thesis, we introduced a holistic Multiple Criteria Decision Making (MCDM) modelling strategy in personal behavioural investment decision making. Analytical Hierarchical Process (AHP) is selected as the most appropriate modelling approach in considering its matching with human thinking process and intuition. After modelling the thinking process of decision making, we use state-dependent utility function to express investment goals, with the consideration of human behavioural factors. The assumption of human rationality which was made in most finance theory and research papers was relaxed. Moving on, Multi-Objective Decision Making (MODM) method is adopted to seek optimal values. Within MODM, the interactive MODM approach we adopted offer investors opportunities to participate in their own decision making process. In particular, a basket of interactive MODM methods is prepared allowing the selection of the most suitable algorithms, matching individuals with different profiles and preference. At the end of the day, we still believe the breakthrough this Thesis made in behavioural investment thinking and interactive decision making process would aid the investors in achieving their goals.