Behavioral Finance versus Standard Finance

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Abstract

Behavioral finance is built on the framework of standard finance but supplies a replacement for standard finance as a descriptive theory. Behavioral finance reflects a different model of human behavior and is constructed of different components—prospect theory, cognitive errors, problems of self-control, and the pain of regret. These components help make sense of the world of finance—including investor preferences, the design of modem financial products, and financial regulations—by making sense of normal investor behavior.This presentation comes from the Improving the Investment Decision-Making Process: Behavioral Finance and Decision Theory conference held in Marina del Rey, on April 4, 1995.