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 ?
This would have an adverse impact on the investment psychology and capital flows in Singapore.
Investment psychology is at its worst at the moment.
A phrase I have heard to describe investment psychology at the moment is "confused apathy." Active managers struggle to generate alpha; beta looks tired, stretched and expensive; bond yields are incredibly low; the political environment is unpredictable.
Investment psychology also differs somewhat by gender, with male investors showing greater tolerance for risk than female investors.
"Presently, the global investment psychology is risk-averse, which affects the ability for exploration companies to access capital to advance projects," Williams said.
Forecasting Financial Markets: The Psychology of Successful Investing offers college-level readers a fine, well-detailed introduction to investment psychology. The focus here is on how group mentality and perceptions of financial wealth have serious implications for financial market swings--and it explains why trading success depends on the ability to understand finances in logical terms, recognize emotional responses to market fluctuations, and handle clues to buying and selling trends.
To what extent has the steep sell-off in global stock markets affected the European investment psychology?
To boost her knowledge, she spent $2,000 on a seven-day class designed to teach her as much as possible about trading--everything from investment psychology to the technical strategies used by securities pros.
It is interesting to see the European investment psychology switching again as they are once more looking at the United States in general, and at New York in particular, as a safe place for business and trade, where - despite some cyclical adjustments - one should have a presence if one wants to be international.

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