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 impact of financial literacy education on subsequent financial behavior.
Using two national longitudinal studies: the 1979 National Longitudinal Survey Children and Young Adults (NLSCYA) and the 1979 National Longitudinal Survey (NLSY79), we link the financial behavior of 2,520 young adults back to their general self-control skill and their parents' financial behavior conducted during children's adolescence.
Observed discrepancies exist between reported and actual financial behavior.
The last part of Volume 2 presents emerging research on the relevance of social interactions for household financial behavior.
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.
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.
This financial behavior is called 'mattress money' because psychologically, it is accessible just like having money under a real mattress," says Geller.
His Allowance-Plus firm was set up to help parents not only manage their childrena[euro](tm)s finances, but to also motivate and reward desirable financial behavior.
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.
In this paper we provide a comprehensive critical analysis of research that has investigated the impact of financial education programs on consumer financial behavior.

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