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 ?
The purpose of the seminar is to encourage the students to acquire learned financial behavior as early as possible in their career pursuit to equip them with the requisite financial understanding for making responsible and well considered investment decisions in the future.
The results indicate that external locus of control has the highest total effect on youth financial behavior followed by parental influence and motivation.
This is logical and can be attributed to varying socio-economic factors that affect financial behavior positively or negatively.
Frank Votaw, Chief Operating Officer at Voth Nixon Group said: "The ethic of financial behavior represents the key foundation of building the role of employers as choice designers for their employees.
The Spend Monitor makes it easy for consumers to track their finances and identify changes in financial behavior through three key factors: spending alerts pinpoint increased or unusual activity in a given category; suspicious activity such as double charges and potential fraud are highlighted to help users spot issues early; and a color-coded view helps users see where and how they could have earned more rewards.
The survey showed that while only one in seven (15 percent) of all survey respondents are still coping with the effects of the Great Recession, seven out of 10 changed their financial behavior as a result.
This financial behavior is called 'mattress money' because psychologically, it is accessible just like having money under a real mattress," says Geller.
SaveUp makes positive financial behavior fun, rewarding, and engaging, a recipe that could have a major impact on credit unions and the communities they serve," Davis said.
For a generation or so after World War II, financial behavior was sensible and moderate.
Hurst's main area of research is household financial behavior.
He said that the recommendations stressed that international transparency criteria should be applied when it comes to the government's financial behavior.
The quarterly survey is designed to track the American consumer's financial behavior and mindset, and is based on the online responses of roughly 3,000 consumers.

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