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 ?
TTCKPS has proved its role of effective risk protection, has a stable effect on investor psychology, especially when the underlying market fluctuates strongly, is a risk prevention tool for the securities portfolio.
164,000 224,000 New York State Consumer Price Index--NY, NJ, CT 0.30% 0.20% Unemployment Rate 4.00% 4.00% Empire State Manufacturing Survey 4.30% -8.60% Forte Capital's Proprietary Bullish Neutral Bearish Market Risk Barometer 10 9 8 7 6 5 4 3 2 1 Market Valuation 4 Monetary Environment 8 Investor Psychology 4 Internal Market Technicals 5 As of 8/2/19 Overall Short-Term Outlook 4.4 Overall Long-Term Outlook 6.35 Equity Market Statistics Most Recent Prior Month Dow Jones Industrials 8/2/19 6/28/19 Dividend Yield 2.40% 2.55% Price/Earnings (12 Mth Trailing) 17.62 16.56 Price/Earnings (Projected] 16.67 15.52 S&P 500 Index 8/2/19 6/28/19 Dividend Yield 1.98% 2.10% Price/Earnings (12 Mth Trailing) 21.09 18.94 Price/Earnings (Projected) 16.95 16.20
"We'll stand on the sidelines and wait for the market to cool down," said Zhou, a contrarian investor who embraces behavioural finance - the study of investor psychology - in his investment strategy.
The course-work includes client assessment and suitability, risk/return, investment objectives, bond and equity portfolios, modern portfolio theory and investor psychology.
However, it seem to be a significant source of concern among various FOMC members, and hence has been important to investor psychology and market flows.
A Crisis of Beliefs: Investor Psychology and Financial Fragility
When it does, it would be helpful for investor psychology to remember that it is only by testing the extremes do we get some sense of perspective of the balance and the funambulistic role that governments play.
Each also requires a different investor psychology and amount of work and monitoring.
Which is where we get into investor psychology. A certain amount of volatility can be a good thing.
Named this past April Chief of Investor Psychology for Creative Planning, the nation's No.
In this paper, which marks the commencement of a large project studying investor psychology, the authors show that this intuition naturally yields boom-bust financial cycles.
The slide represents a shift in investor psychology. After chasing their huge gains in 2013, investors are worried that stocks like Facebook and Gilead Sciences, which doubled last year, have become too expensive.

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