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 ?
The partnership will allow AFCPE professionals the opportunity to access technology-enabled financial psychology tools, while also introducing DataPoints clients to important financial counseling, coaching and education certification and training.
One of my favourite financial psychology questions is: "If the saying is true that money talks, then if I were to ask your money to tell me about its relationship with you, what do you think it would say?" This is incredibly revealing, particularly if I ask for a one-word answer.
By understanding all these factors, you'll be able to serve your clients in ways that your colleagues cannot[, for] you will bring the hugely important component of emotions and behavior to bear, not only to better understand your clients and what makes them tick, but to work with them in a way that is aligned with their emotional nature and temperament." --Chris White, "Working with the Emotional Investor: Financial Psychology for Wealth Managers" (Praeger Press, 2016)
White, who recently wrote the book, "Working with the Emotional Investor: Financial Psychology for Wealth Managers," said that his best advice to clients is sometimes to turn off the radio and television.
To attain this certification, participants need to complete 11 courses, covering: financial psychology; savings, budgeting and account management; credit, debt and loans; investing; retirement preparedness; and methods to effectively discuss money matters with young people.
Interested individuals have the opportunity to become certified instructors by completing 11 required courses covering topics that will help them teach financial psychology; savings, budgeting and account management; credit, debt and loans; investing; retirement preparedness; as well as how to effectively discuss money matters with young people.
--Did not spend time on one of the most important things of all: the financial psychology of how investors behave and how some brokers and advisors behave;
But if the industry (and by industry I do not mean the directors, cinematographers, and those behind the camera, but the mind-set and financial psychology of the industry as a whole) can begin to understand film as a medium--as different from digital in the production of images as photogravure is from ink-jet printing--then they will at last realize that they have two mediums with which to make pictures: two entireiy different autonomous and functioning mediums whose coexistence can increase the wealth and richness of their art.
Go through some financial psychology analysis, a financial DNA as an example so they can begin to help their clients better understand their emotional response to this kind of volatility.
One of the UK's leading financial psychology experts, Benjamin Fry, is working with the Energy Saving Trust to show consumers how saving energy can save money too.