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 ?
On the contrary, behavioural finance suggests investors are not always rational and are influenced by their own biases.
In contrast to Modern Portfolio Theory (Fabozzi, Gupta, and Markowitz, 2002; Markowitz, 1952; Markowitz, 2014) and Efficient Market Hypothesis (Fama, 1995; Fama, 1965; Fama, 1970) the experts of behavioural finance contend that people make irrational financial decisions (Kahneman and Tversky, 1979; Tversky, and Kahneman, 1992; Kahneman, Knetsch, and Thaler 1991).
Professor Alemanni conducted several finance and banking workshops and consulting projects in Europe and Asia and her research activities focus on subjects that include asset management, alternative investments, behavioural finance, and regulation in securities markets.
It will use the latest scientific research from the fields of physics, complex self-organising systems, deep learning and behavioural finance.
"When we speak about spending resolutions, we usually speak about how to encourage people to spend less," said Meir Statman, a behavioural finance professor at Santa Clara University.
Peter Brooks, Barclays' behavioural finance expert, said: "Buying a property is the biggest investment of most people's lives and it's imperative that the negotiation process is approached with a healthy combination of pragmatism and fearlessness.
Peter Brooks, Barclays' behavioural finance expert, said: "Balancing your approach and referring to informed and independent advice will allow for a smoother negotiating process for all parties."
Peter Brooks, Barclays behavioural finance expert, said: "Balancing your approach and referring to informed and independent advice will allow for a smoother negotiating process for all parties."
Behavioural finance research undertaken by the campaign has indicated that customers who receive financial correspondence by post are more likely to be able to correctly assess the health of their accounts compared to those who received correspondence electronically.
"Overconfidence and Debiasing in the Financial Industry." Review of Behavioural Finance 4, no.
He is also an associate at Behavioural Finance Solutions (BhFS) in Zurich, an organization that consults with banks and insurance companies to incorporate insights from behavioral finance into their services, products and business processes.
Shiner, who won the Nobel prize for his pioneering work on share-price volatility, noted that the theories of behavioural finance, which apply psychology to the workings of markets, hadn't quite reached full acceptance when the 2007-08 financial crisis struck.

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