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 ?
It will use the latest scientific research from the fields of physics, complex self-organising systems, deep learning and behavioural finance.
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.
Summary: They do so by ticking all the boxes in what behavioural finance can show up
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.
These observations have led to a field of study called behavioural finance which seeks to understand how and why people invest.
Dr Emily Haisley is a member of Barclay's investment philosophy & behavioural finance team; her background is in academic research and teaching at the intersection of psychology, economics and organisational behaviour.
Behavioural finance admits that psychological characteristics (such as risk aversion, regret, overconfidence) play an important role in financial management of a household; consequently, financial weaknesses could be ascertained which could lead to improvements in financial decision-making and growth of wealth of a household.
Among the names mentioned in economic circles are Americans Robert Shiller, who studies behavioural finance and the erratic movement of markets, Kenneth Rogoff and Carmen Reinhart, who specialise in public debt, and other topics that make the headlines less frequently, such as Paul Romer's work on different types of growth.
Pioneer publications on behavioural finance appeared as early as 1979 (Kahneman and Tversky's critic of utility theory) and 1985 (DeBondt and Thaler's famous paper "Does the stock market overreact?
Behavioural finance seeks to combine behavioural and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions.

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