Behavioral finance and asset prices: Where do we stand?

Abstract

This paper contains a survey of the anomalies identified in the behavioral finance literature, with a particular focus on those which might affect market prices. The anomalies are grouped in five categories, namely (i) decision heuristics, (ii) emotional and visceral factors, (iii) choice bracketing, (iv) unknown preferences, and (v) reference dependence. These anomalies are discussed against the background of the assumptions normally maintained in the standard approach based on expected utility maximization, in order to highlight the difference between the mainstream and the behavioral finance approaches.