Behavioral FinanceKnowledge Center |
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Definition Behavioral Finance?Behavioral Finance (BF) is the study of the influence of psychology on the behavior of financial practitioners and the subsequent effect on financial markets. The approach focuses on observable psychological factors that influence decision-making of financial decision makers. Behavioral effects help explain why and how markets might be inefficient. Behavioral finance is contradicting the Efficient Market Hypothesis. In 1912, G.C. Selden wrote "Psychology of the Stock Market: Human Impulses Lead To Speculative Disasters". He based the book "upon the belief that the movements of prices on the exchanges are dependent to a very considerable degree on the mental attitude of the investing and trading public". In 1956, Leon Festinger introduced the theory of Cognitive Dissonance: in case two simultaneously held cognitions are inconsistent, people will have an uncomfortable feeling that leads towards attitude change in order to reestablish consonance. In 1974, Amos Tversky and Daniel Kahneman described three heuristics that are employed when making judgments under uncertainty:
Behavioral finance applies scientific research on human and social Cognitive and Emotional Biases to better understand economic decisions and how they affect market prices, returns and the allocation of resources. The behavioral finance field is primarily concerned with the lack of rationality of economic agents. Behavioral models typically integrate insights from psychology with neo-classical economic theory.
Compare with: Cognitive Bias | Investor Sentiment | Short Selling | Analogical Strategic Reasoning | Bounded Rationality | Framing | Groupthink | Systemic Risk | Index Fund | Mutual Fund | Qualitative Investment Analysis | Whisper Number | Feedback Loops |
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