Behavioral Finance: Introduction
By Albert Phung
According to conventional financial theory, the world and its participants are, for the most part, rational "wealth maximizers". However, there are many instances where emotion and psychology influence our decisions, causing us to behave in unpredictable or irrational ways.
Behavioral finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions.
By the end of this tutorial, we hope that you'll have a better understanding of some of the anomalies (i.e., irregularities) that conventional financial theories have failed to explain. In addition, we hope you gain insight into some of the underlying reasons and biases that cause some people to behave irrationally (and often against their best interests). Hopefully, this newfound knowledge will give you an edge when it comes to making financial decisions.
(For related reading, see Taking A Chance Of Behavioral Finance and Leading Indicators Of Behavioral Finance.)
According to conventional financial theory, the world and its participants are, for the most part, rational "wealth maximizers". However, there are many instances where emotion and psychology influence our decisions, causing us to behave in unpredictable or irrational ways.
Behavioral finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions.
By the end of this tutorial, we hope that you'll have a better understanding of some of the anomalies (i.e., irregularities) that conventional financial theories have failed to explain. In addition, we hope you gain insight into some of the underlying reasons and biases that cause some people to behave irrationally (and often against their best interests). Hopefully, this newfound knowledge will give you an edge when it comes to making financial decisions.
(For related reading, see Taking A Chance Of Behavioral Finance and Leading Indicators Of Behavioral Finance.)
Next: Behavioral Finance: Background »
Table of Contents
- Behavioral Finance: Introduction
- Behavioral Finance: Background
- Behavioral Finance: Anomalies
- Behavioral Finance: Key Concepts - Anchoring
- Behavioral Finance: Key Concepts - Mental Accounting
- Behavioral Finance: Key Concepts - Confirmation and Hindsight Bias
- Behavioral Finance: Key Concepts - Gambler's Fallacy
- Behavioral Finance: Key Concepts - Herd Behavior
- Behavioral Finance: Key Concepts - Overconfidence
- Behavioral Finance: Key Concepts - Overreaction and Availability Bias
- Behavioral Finance: Key Concepts - Prospect Theory
- Behavioral Finance: Conclusion
by
Albert Phung
Albert Phung is a writer and analyst for Investopedia.com. He graduated from the University of Alberta with degrees in psychology and finance.
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