Top Research Papers on Behavioral Finance

Seit über 50 Jahren dominiert die neoklassische Kapitalmarkttheorie unser Verständnis für die Abläufe an Finanzmärkten. Sie hat eine Vielzahl von Theorien und Konzepten hervor gebracht und basiert auf der Annahme eines streng rationalen Homo Oeconomicus. Das vorliegende Buch möchte Studierenden und Praktikern die Türe öffnen zu einer neu entstehenden, verhaltenswissenschaftlichen Sicht auf die Finanzmärkte in der ein realitätsnäherer Homo Oeconomicus Humanus an den Märkten agiert. Er setzt bei der Entscheidungsfindung begrenzt rationale Heuristiken ein und lässt sich von emotionalen Einflüsse...

Behavioral finance studies the application of psychology to finance, with a focus on individual-level cognitive biases. I describe here the sources of judgment and decision biases, how they affect trading and market prices, the role of arbitrage and flows of wealth between more rational and less rational investors, how firms exploit inefficient prices and incite misvaluation, and the effects of managerial judgment biases. There is need for more theory and testing of the effects of feelings on financial decisions and aggregate outcomes. Especially, the time has come to move beyond behavioral fi...

Article History

Noting that, in recent years, dozens of academic articles have been written on the subject of behavioral finance, the authors first propose a brief review of the literature and argue that its main message is that behavioral factors affect virtually every aspect of finance—from prices of individual stocks to absolute returns and from individual retirement planning to investor confidence. Yet, they identify a void with respect to discussions as to how active portfolio managers have long applied behavioral finance to the investment process. They go on to explain some market anomalies created as a...

Behavioral Finance

People tend to be penny wise and pound foolish and cry over spilt milk, even though we are taught to do neither. Focusing on the present at the expense of the future and basing decisions on lost value are two mistakes common to decision-making that are particularly costly in the world of finance. Behavioral Finance: What Everyone Needs to KnowR provides an overview of common shortcuts and mistakes people make in managing their finances. It covers the common cognitive biases or errors that occur when people are collecting, processing, and interpreting information. These include emotional biases...

Behavioral finance began as an attempt to understand why financial markets react inefficiently to public information. One stream of behavioral finance examines how psychological forces induce traders and managers to make suboptimal decisions, and how these decisions affect market behavior. Another stream examines how economic forces might keep rational traders from exploiting apparent opportunities for profit. Behavioral finance remains controversial, but will become more widely accepted if it can predict deviations from traditional financial models without relying on too many "ad hoc" assumpt...

While conventional academic finance emphasizes theories such as Modern Portfolio Theory (MPT) and the Efficient Market Hypothesis (EMH), the emerging field of behavioral finance investigates the cognitive factors and emotional issues that impact the decision-making process of individuals, groups, and organizations. This paper presents an introduction to some general principles of behavioral finance including: overconfidence, cognitive dissonance, regret theory, and prospect theory. Also, this article provides strategies to assist individuals to resolve these mental errors and emotional pitfall...

Behavioral theory in finance ties finance theory and practice to human behavior. This paper aims at reviewing behavioral finance principles, concepts and theories. This paper starts with the shift from EMH/CAPM paradigm to behavioral finance. Then, the paper goes through the financial anomalies including the size effect, value effects, momentum effects, weekend effect and turn-of-the year effect. Finally, the paper addresses the key pillars of behavioral finance by explaining the limits to arbitrage and the main behavioral biases.

Managers and corporate directors need to recognize two key behavioral impediments that obstruct the process of value maximization, one internal to the firm and the other external. I call the first obstruction behavioral costs. Behavioral costs, like agency costs, tend to prevent value creation. Behavioral costs are the costs associated with errors that people make because of cognitive imperfections and emotional influences. The second obstruction stems from behavioral errors on the part of analysts and investors. These errors can create gaps between fundamental values and market prices. When t...

Behavioral Corporate Finance provides new and testable explanations for long-standing corporate-finance puzzles by applying insights from psychology to the behavior of investors, managers, and third parties (e. g., analysts or bankers). This chapter gives an overview of the three leading streams of research and quantifies publication output and trends in the field. It emphasizes how Behavioral Corporate Finance has contributed to the broader field of Behavioral Economics. One contribution arises from the identification of biased behavior (also) in successful professionals, such as CEOs, entrep...

These are slides from a presentation to the Gruter Institute for Law and Behavioral Research, Squaw Valley Conference, May, 2008 (at which event Michael Jensen got me to agree to post these slides as a pdf on SSRN . . . ). The task is to give an overview of what I hope to be an emerging field of behavioral public finance. Behavioral finance, as per Barberis and Thaler 2003 (and others), consists of two parts: (1) individual level heuristics and biases, which can lead to sub-optimal (inconsistent) judgment and decision-making, and (2) institutional arbitrage mechanisms. In private finance and e...

In this paper, we tray answer the big question is, what is a behavioral finance? This paper reviews some side in behavioral finance topic: Behavioral Finance Battle, history of behavioral finance, Economic Utility Theory, Prospect Theory, A Behavioral Approach to Efficient Portfolio Formation & Behavioral Portfolio Theory.

This paper discusses the importance of behavioral finance in filling the gap that modern portfolio theory left exemplified by the existence of a lot of investment sagas. This is part of a series of papers for the partial fulfillment of PhD in Business Management with Universidad Empresarial De Costa Rica.

One of the most critical research programs of today's financial knowledge that is at the top of the rejection of the theory of efficient markets is financial behavior theory. This theory is the result of collaboration between financial sciences and social sciences and makes our knowledge of financial markets deeper. Behavioral finance is a new branch of financial knowledge. Behavioral finance at the macro level challenges classical financial theories, particularly capital efficient market theory. Behavioral finance at the micro level shows that behavior of investors in the real world is incomp...

Behavioral Finance is the study of the impact of psychology and its influence on the behavior of market practitioners. Its study covers both; the individual level and the group level. Behavioral finance has two building blocks: cognitive psychology and the limits to arbitrage. People are many times overconfident; gut feel, anchoring, cognitive dissonance, wishful thinking bias, etc. often mar their thought process even while making decisions about rather important issues such as how to invest in a pension plan, or how to invest their savings of a life time. Behavioral finance is an attempt to ...

Behavioral finance is a financial theory that has risen since 1980s. The theory is now in the forward position of financial research and practice as well as a hot topic in western countries. Based on synthesizing foreign research achievement, starting with the relationship between behavioral finance and traditional finance theory, this paper gives a detailed introduction to behavioral finance theory, at the end, puts forward the prospects for the future development of this theory.

While efficient market hypothesis was faced with great challenges in both the theory and its practice since 1980,behavioral finance has been booming. This paper elaborates the background and development stages of behavioral finance and generalizes its theory bases and major models. Finally it discusses and points out its prospects.

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 theori...

Finance is in the midst of a paradigm shift, from a neoclassical based framework to a psychologically based framework. Behavioral finance is the application of psychology to financial decision making and financial markets. Behavioralizing finance is the process of replacing neoclassical assumptions with behavioral counterparts. This volume surveys the literature in behavioral finance, and identifies both its strengths and weaknesses. In doing so, it identifies possible directions for behavioralizing the frameworks used to study beliefs, preferences, portfolio selection, asset pricing, corporat...