The Global Financial Crisis from the perspective of Behavioral Finance

Abstract

In this article we analyze the causes and the specific development of the global financial and economic crises from 2007 – 2008 using concepts from the emerging field of behavior finance. Explanation of the failure of financial markets is sought, on the basis of prospect theory, in cognitive biases and errors studied in behavioral research. Evidence refuting the postulates of the efficient market hypothesis is summarized to substantiate the need of a more realistic theory grounded in predictable patterns of ‘bounded rational’ market behavior.