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 ?
'Although the FBR's performance had remained below average Punjab was able to post a 46 per cent growth in revenue resource generation in one year,' he told reporters on the sidelines of a symposium on Behavioural Economics in Policy Making organised by the Lahore School of Economics in collaboration with B4Development on Tuesday.
Speaking at the symposium earlier, the provincial finance minister said Punjab had experimented some behavioural economics in the Punjab Revenue Authority's Restaurant Invoice Monitoring System.
Lahore School of Economics in collaboration with B4Development (formerly Qatar Behavioural Insights Unit, created by the Supreme Committee for Delivery and Legacy in 2016 hosted a symposium on Behavioural Economics in Policy Making on 3 September 2019 at Pearl Continental Hotel, Lahore.
The objective of the event was to summarise the experiences and insights from successful behavioural programmes from around the world on the role that behavioural economics can play in matters of compliance, public finance and accountability.
Those disciplines range from the more generic ones of micro- and macro-economics, to ones that are more field- and industry-specific such as fiscal economics, monetary economics, health economics, and behavioural economics.
The need to increase global partnerships for the purpose of invention and applying the basis of behavioural economics in order to best serve policies for integration and empowerment was the focus of these talks.
It discusses in detail how application of behavioural economics can prove to be a valuable instrument of change in a country like India where social and religious norms play a dominant role in influencing behaviour.
He listed behavioural economics, legal reforms, data as a public good and unshackling MSMEs to create jobs and productivity in the economy as the tactical tools behind shifting the gears of the economy.
Robert Shiller,winner of a Nobel Prize in Economics wrote: "Richard Thaler has been at the center of the most important revolution to happen in economics." In this book he lays out evidence for behavioural economics.
Microfinance--arguably the biggest, if unwitting, behavioural economics experiment ever conducted--found an innovative solution: by replacing economic incentives with emotional engagement, it managed to get a billion of the world's poorest women to repay loans almost 100 per cent of the time.
The Supreme Committee for Delivery & Legacy (SC), in partnership with Qatar Foundation (QF), has launched an initiative to promote and share knowledge about behavioural economics in Qatar.
Fadi Makki, member of the Council for Behavioural Sciences at the World Economic Forum, and pioneer in the application of behavioural economics to public policy in the Middle East, will give a presentation about "Applications of behavioural economics and nudge concepts in various education policy settings" followed by a question and answer session.

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