Behavioural Finance teaches us that human beings have biases. Among them is under-reaction, which might best be described as trend- or crowd-following - in violation of the commandment to not covet your neighbour’s goods. The other principal bias is over-reaction, the tendency to become hysterical at reverses, then noticeably overdo your response before somewhat correcting your own actions.

Behavioural Finance plays a significant role in explaining the irrational behavior of investors, including that of professional investors. Though some good examples that illustrate this do exist - notably the recent book by Dan Ariely, “Predictably Irrational”, as well as a more classical collection by Richard H. Thaler, “The Winner’s Curse” - they provide few, if any, practical examples of irrational behavior in actual financial price series.

In the examples alongside (see Fig.1 & Fig.2) we present some direct quantitative statistical testing of raw financial data which gives Behavioural Finance some practical justification. These examples are based on the assumption that if the financial world consisted of only rational agents, then the series of price changes of financial assets would follow a Random Walk. Given this assumption, we can pinpoint inefficiencies by comparing the statistics for price differences (or returns) of a given financial asset to that of a Random Walk.