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 number of Common Units and Flow-Through Units to be sold pursuant to the Offering will be determined by the Issuer based on investor preference.
Blake Goud, CEO of the RFI (Responsible Finance and Investment) Foundation, explains that the dynamic is largely led by demand (investor preference): "Changing the 'demand side' will give a spur for the 'supply side' to grow," he said.
Ana, investor preference is now on the shorter end of the curve as they are still on a lookout for more catalysts.
Investor preference for parking funds in longer-dated securities is seen to be fueled by the country's inflation trajectory in the domestic front, as well as updates from the Federal Reserve System (the Fed) for the offshore setting, he noted.
Given this structural pivot in investor preference, the SC has identified SRI and as well as the closely- related Islamic fund and wealth management segment as one of growth drivers for the next phase of Malaysia's capital market development.
This pattern is in line with the foreign investor preference for money market instruments in the last two quarters, contrasting with a five-year (2013-2017) lasting preference for the equity market.
Three European CLOs were issued during 2Q18 with a mix of senior and junior 'AAA' rated notes to accommodate investor preference. Average CE for senior and junior 'AAAsf' rated notes in these structures was 41% and 38.5%, respectively.
The television campaign is the latest phase of Schwab's ongoing advocacy and awareness efforts on behalf of independent advisors, which aim to educate high-net-worth investors on the attributes of the independent model and help drive investor preference for the space.
An investor preference that for decades reduced borrowing costs for the U.S.
'You can expect property land values continuing to appreciate, as well as the investor preference. You can also expect a sustained, vibrant tenant or rental market for Newport,' he disclosed.
A section on investments groups online providers by investor preference, offering different levels of hands-on (or hands-off) engagement, presents a brief description of each organization, and links to the website.

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