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.

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Hall also describes the greatest lies and facts of life associated with every real estate transaction, and presents investment tips and techniques based on property type, market area, and even individual investor preference.
Vincent Barberio, Managing Director at Fitch, noted that, 'The SHFAs' trend of increased issuance of variable-rate debt over the past four years highlights the dramatic shift in investor preference over that time.
Amid strong investor preference for government debt, the Finance Ministry set the coupon rate for the August issue of the key 10-year bond at 1.
The number gave rise to investor preference for riskier assets such as the Australian dollar, prompting them to sell the yen, which in turn weakened against the dollar, they added.
Giordano added, 'We expect the SHFAs to continue issuing variable-rate debt at relatively similar levels given the overall shift in investor preference away from long-term fixed-rate housing bonds to shorter-dated securities.
Compared to the findings of earlier surveys, these results show a significant shift in investor preference from an emphasis on growth investing towards a more value-oriented, conservative investment style," commented Duncan W.
As such, movements in short-term rates should continue to be a function of investor preference for short-term T-Bills and the Fed's decisions on the Federal Funds Target Rate, which Fed Chairman Ben Bernanke has expressed his commitment to keeping the target rate low for an "extended period.
currency due to investor preference for higher-yielding currencies.
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Investor preference for riskier assets receded as oil and stock prices fell, leading to dollar buying against other major currencies, especially the risk-sensitive euro, dealers said.
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All asset classes eventually become over-valued after a long period of investor preference.

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