Financial Economics


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.

BREAKING DOWN '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.

  1. Rational Behavior

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  2. Behavioral Finance

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  3. Behavioral Economics

    The study of psychology as it relates to the economic decision ...
  4. Econometrics

    The application of statistical and mathematical theories to economics ...
  5. Homo Economicus

    A term that describes the rational human being assumed by some ...
  6. Market Psychology

    The overall sentiment or feeling that the market is experiencing ...
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