Behavioral finance

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Behavioral finance

An important subfield of finance. Behavioral finances uses insights from the field of pyschology and applies them to the actions of individuals in trading and other financial applications.

Behavioral Finance

A theory of finance that attempts to explain the decisions of investors by viewing them as rational actors looking out for their self-interest, given the sometimes inefficient nature of the market. Tracing its origins to Adam Smith's The Theory of Moral Sentiments, one of its primary observations holds that investors (and people in general) make decisions on imprecise impressions and beliefs rather than rational analysis. A second observation states that the way a question or problem is framed to an investor will influence the decision he/she ultimately makes. These two observations largely explain market inefficiencies; that is, behavior finance holds that markets are sometimes inefficient because people are not mathematical equations. Behavioral finance stands in stark contrast to the efficient markets theory. See also: Naive diversification, Formula plan, Subjective probabilities.

Behavioral finance.

Behavioral finance combines psychology and economics to explain why and how investors act and to analyze how that behavior affects the market.

Behavioral finance theorists point to the market phenomenon of hot stocks and bubbles, from the Dutch tulip bulb mania that caused a market crash in the 17th century to the more recent examples of junk bonds in the 1980s and Internet stocks in the 1990s, to validate their position that market prices can be affected by the irrational behavior of investors.

Behavioral finance is in conflict with the perspective of efficient market theory, which maintains that market prices are based on rational foundations, like the fundamental financial health and performance of a company.

References in periodicals archive ?
Part 4 training block on the topic: Economic behavior of the company in the market environment,
The research was published in the Journal of Economic Behavior & Organization.
Basic supply and demand analysis opens the text, followed by the principles of economic behavior, consumption, labor markets, capital, and competition.
Tusk added that he intended to speak with Chancellor Merkel "in what way Germany could correct its economic behavior so that dependence on Russian gas does not paralyze Europe when it needs to act quickly and unambiguously".
In a recent article on Benzinga, Bruce Kennedy pointed out that, "Academics who monitor economic behavior, meanwhile, believe the combination of new, rapidly-developing technologies and economic uncertainty have given the rental culture momentum.
It holds the author's critique of financial market function and theory and provides a new lens through which we can view economic behavior.
He is past president of the Association of Private Enterprise Education, editor of the Journal of Private Enterprise, editor of two books, and author of more than two dozen articles in refereed journals, including Journal of Economic Behavior and Organization, Journal of Institutional & Theoretical Economics, and Public Choice.
While resolution regarding the legality of piracy will remain a matter of debate globally, consumers will continue to illegally download online contents in the absence of properly set and carefully studied reward and punishment systems that will alter this economic behavior.
The study is published in the Journal of Economic Behavior and Organization.
The interaction between emotions and economic behavior is a well-followed methodology in the experimental psychology discipline (see Westermann et al.
The study was released in the February 2013 edition of Journal of Economic Behavior & Organization.
Operant behavior is therefore economic behavior in that it is the allocation of a limited number of responses among competing alternatives.

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