Financial Economics

AAA

DEFINITION of 'Financial Economics'

A branch of economics that analyzes the use and distribution of resources in markets in which decisions are made under uncertainty. Financial decisions must often take into account future events, whether those be related to individual stocks, portfolios or the market as a whole. Financial economics employs economic theory to evaluate how time, risk (uncertainty), opportunity costs and information can create incentives or disincentives for a particular decision.

INVESTOPEDIA EXPLAINS 'Financial Economics'

Financial economics often involves the creation of sophisticated models to test the variables affecting a particular decision. Often, these models assume that individuals or institutions making decisions act rationally, though this is not necessarily the case. Irrational behavior of parties has to be taken into account in financial economics as a potential risk factor.

RELATED TERMS
  1. Rational Behavior

    A decision-making process that is based on making choices that ...
  2. Econometrics

    The application of statistical and mathematical theories to economics ...
  3. Behavioral Finance

    A field of finance that proposes psychology-based theories to ...
  4. Homo Economicus

    A term that describes the rational human being assumed by some ...
  5. Behavioral Economics

    The study of psychology as it relates to the economic decision ...
  6. Market Psychology

    The overall sentiment or feeling that the market is experiencing ...
Related Articles
  1. Active Trading Fundamentals

    Understanding Investor Behavior

  2. thinkstock|istock
    Active Trading

    What Is Market Efficiency?

  3. Fundamental Analysis

    The Difference Between Finance And Economics

  4. Active Trading Fundamentals

    Why Investors Stick With Failing Stocks

Hot Definitions
  1. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  4. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  5. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  6. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
Trading Center