Behavioural Finance and Market Anomalies: The Dieselgate Dilemma

This thesis explores the intersection of behavioral finance and market anomalies through the lens of the Dieselgate scandal, where Volkswagen was found to have manipulated emissions data for diesel engines. Behavioral finance, which challenges traditional assumptions of market efficiency, suggests that psychological biases and irrational behaviors among investors can lead to significant market anomalies. The Dieselgate scandal provides a rich case study of such phenomena, as market participants exhibited reactions that deviated from rational expectations. This paper examines the immediate market response, characterized by an overreaction to negative news, followed by a slow recovery as investors re-evaluated the company’s fundamentals. It highlights key behavioral biases such as loss aversion, herding, and availability heuristics that influenced investor behavior. Additionally, the paper assesses how regulatory risks, corporate malfeasance, and ethical concerns influenced long-term market anomalies and stock performance. The study concludes by reflecting on the broader implications for financial markets and the need for integrating behavioral insights to better understand market dynamics in the face of corporate scandals.