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 ?
Culture Differences and Tax Morale in the United States and in Europe', 2006, Journal of Economic Psychology, vol.
The author covers file sharing systems and the law, economic psychology issues inherent in illegal online file sharing by individuals and institutions and illegal online file sharing as production systems, illegal online file sharing and information producersAE strategies, the economics of digital context, and many other related subjects in fourteen chapters.
Proceedings of the 24 International Symposium on Economic Psychology, Belgirate, Italy.
2010), 'National well-being and international sports events', Journal of Economic Psychology, 31, pp.
In this special issue, the 22 presentations that have been accepted for publication have been grouped together into eight classical domains in psychology: Methodology (one paper), Psychophysics (one paper), Educational Psychology (three papers), Economic Psychology (four papers), Moral Science (four papers), Political Psychology (two papers), Health Psychology (five papers), and Cross-Cultural Psychology (two papers).
Industrial Relations, 1991, Verhaest and Omey, Journal of Economic Psychology, 2009).
Denitsa Zheleva, an adviser on foreign policy, is a Master of Scandinavian Studies, Americna Studies and Economic Psychology from the Friedrich-Wilhelm University in Bonn, Germany.
The most significant statement about economic psychology is contained in the following words: "Economics like other social sciences deals with human behavior.
Shaul Shalvi of Ben-Gurion University of the Negev's Department of Psychology and director of BGU's Center for Decision Making and Economic Psychology, and fellow researcher Carsten K.
Adapted from The Marketing Firm: Economic Psychology of Corporate Behaviour (pp.
Published as a topical issue of the journal Zeitschrift fur Psychologie/Journal of Psychology, this volume provides 7 empirical papers on economic psychology.