Behavioral finance

Also found in: Acronyms, Wikipedia.

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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
"The amount of luck as opposed to skill is incredible, yet most people attribute their performance to skill, not luck" says Hersh Shefrin, author of Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing.
Embedding the principles of behavioral finance in an investment management offering can greatly improve an investor's experience, Crosby said.
This gap in financial research is the primary focus of behavioral finance. Prominent representatives of this modern capital market theory approach are mainly American professors like Werner de Bondt, Robert Shiller, Andrei Shleifer, Richard Thaler, and Robert Vishny and the German, Martin Weber.
"So behavioral finance teaches us to expect excessive short-term trends and overreactions to events like the British vote," Perry said.
Yet I've been largely disappointed that behavioral finance hasn't been able to tell advisors more about how clients think.
TD Ameritrade Institutional, the lead founding sponsor of the Center for Financial Planning, is supporting the Colloquium and sponsoring the Best Paper Award in the discipline of behavioral finance.
Alpha Architect's strategies are rooted in the science of behavioral finance with a goal of beating behavioral bias.
PerkUp is a fully automated, credit union-sponsored online program, accessible from in-plant kiosks or from any digital device that incorporates rewards and behavioral finance tools to engage employees.
Later parts in this volume cover risk aversion, under-diversification, and behavioral finance research into financial literacy and cognition.
Q: Investment objectives aside, we have been reading a great deal about the importance of behavioral finance. Should financial advisors be making an effort to incorporate the principles of behavioral finance into their practices in order to cultivate the kind of deeper client/professional relationships that this post-crisis era calls for?
Behavioral finance is taking the lead in a substantial number of 401(k) plans -- because why?
She does complement the mathematics with behavioral finance theory, which takes techniques from psychological research to investigate financial decision making.

Full browser ?