Making Sense of Behavioral Finance

Abstract

This paper demonstrates that in order to fully appreciate the nuances of financial theory, it is imperative to examine the contributions that behavioral finance has made in applying psychological paradigms to pure mathematical modeling. The current study provides an overview of the major topics and theories related to behavioral finance, including prospect theory, investor biases and inefficient markets in order to assist in managerial decision-making. The integration of behavioral elements to portfolio construction, asset pricing and wealth management are also addressed. As many of the theories of behavioral finance are of a nascent nature, the study concludes with areas for future research.