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 ?
He found money behavior falls into six definable patterns, or "Money Types," and everyone has a predominant financial personality.
We interpret these results as being generally consistent with the cyclical money behavior in the United States reported (using quarterly data) by Kydland and Prescott (1990) and Belongia (1996).
In spite of their different approaches to understanding money behavior, these investigators agree that much of money behavior is hardly rational; rather, it is the result of powerful and often unrecognized (emotional) forces that reside deep in the psyches of individuals.
The questionnaire determines attitudes on 13 financial traits that influence money behavior and investment decisions.
During the past decade, he has been a crusader for teaching adults and children alike about responsible money behavior.
According to Myvesta, people who agree with two or more of the money behavior statements are likely to be a money abuser.
Johnson quickly embraced the lessons she learned in the Money Matters program and applied them to her own money behavior.
To address their employees' financial well-being, employers are offering financial education and financial wellness programs at work in an attempt to help employees change their money behaviors and increase their financial literacy, including on-site money management and financial planning seminars.
To do so, seize control by identifying your money behaviors and changing or modifying them with the appropriate financial management techniques.
They are committed to pursuing frugal money behaviors, and they are focusing on the positive ways these changes may impact their families and the nation.
4] When asked about their anticipated changes, 75 percent of moms selected saving money behaviors.