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.
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 ?
(and other countries) have legitimate complaints about Chinese economic behavior such as the theft of intellectual property and subsidies to state-owned companies that have tilted the playing field in trade.
They address theory and methods, including the history of cultural psychology, cultural neuroscience, culture and ecology, and cultural evolution; aspects related to cognition, emotion, and motivation, including culture and intelligence, perception, language, well-being and health, and cultural-clinical psychology; acquisition and change of culture, with discussion of culture and development, moral development, food and eating, learning new cultures, acculturation, making meaning, and multiculturalism; culture and economic behavior, including work; and different forms of culture, such as ethnicity, personality, geographical variation in the Big Five personality domains, cultures of honor, transnational terrorism, and religious cultures and religious conflict.
It will triumph only when Armenian citizens change their economic behavior. Therefore, the government program has no numbers, digital indicators.
Carlin is also Principal Investigator for the Sloan-Nomis Program on Cognitive Foundations of Economic Behavior and the Vanguard Research Initiative.
The findings appeared in the Journal of Economic Behavior and Organization.
Personal statement: "My dream is to work in finance or investment banking, both careers which require a strong mathematical foundation and a perception of economic behavior. Each decision is a balance of risk and reward, with consequences for each action taken.
tax and transfer system, in particular its effects on revenues, expenditures, and economic behavior. James Andreoni examines donor-advised funds, which are financial vehicles offered by investment houses to provide savings accounts for tax-free charitable giving, and weighs their effects on donations against their tax cost.
Whereas implicit gender bias occurs where tax systems intersect with gender relations, norms and economic behavior. For example, because gender norms assign household and childcare responsibilities to women, women tend to use a larger portion of their income on basic goods such as food and clothing.
"Reputation Formation in Economic Transactions." Journal of Economic Behavior & Organization, 121, 2016, 1-14.
"You can detect patterns in economic behavior but you cannot find equilibrium because behaviour continues to change," he noted.
Granovetter showed that economic action is embedded in social relations and criticized neoclassical economics' view of "utilitarianist, atomized, and undersocialized individual." (2) In addition, the role of psychological factors in individuals' economic behavior has also been ignored and neoclassical economics reduced economic behavior to formal presentations of utility maximization without emotions and social relations.

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