Behavioral finance

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Behavioral finance

An important subfield of finance. Behavioral finances uses insights from the field of pyschology and applies them to the actions of individuals in trading and other financial applications.

Behavioral Finance

A theory of finance that attempts to explain the decisions of investors by viewing them as rational actors looking out for their self-interest, given the sometimes inefficient nature of the market. Tracing its origins to Adam Smith's The Theory of Moral Sentiments, one of its primary observations holds that investors (and people in general) make decisions on imprecise impressions and beliefs rather than rational analysis. A second observation states that the way a question or problem is framed to an investor will influence the decision he/she ultimately makes. These two observations largely explain market inefficiencies; that is, behavior finance holds that markets are sometimes inefficient because people are not mathematical equations. Behavioral finance stands in stark contrast to the efficient markets theory. See also: Naive diversification, Formula plan, Subjective probabilities.

Behavioral finance.

Behavioral finance combines psychology and economics to explain why and how investors act and to analyze how that behavior affects the market.

Behavioral finance theorists point to the market phenomenon of hot stocks and bubbles, from the Dutch tulip bulb mania that caused a market crash in the 17th century to the more recent examples of junk bonds in the 1980s and Internet stocks in the 1990s, to validate their position that market prices can be affected by the irrational behavior of investors.

Behavioral finance is in conflict with the perspective of efficient market theory, which maintains that market prices are based on rational foundations, like the fundamental financial health and performance of a company.

References in periodicals archive ?
Scholars working in the sociology of markets, organization theory, and strategy research in North America, Europe, and South Korea provide 11 essays on categorization as a cognitive and social process, focusing on categories in the context of markets.
Twenty-five chapters are divided into four parts: foundations of economic sociology, the sociology of markets, the sociology of firms and industries, and comparative and historical economic sociology.
Orderly Fashion: A Sociology of Markets. Princeton, N J: Princeton University Press, 2010.
Aspers, Patrik, Orderly Fashion: A Sociology of Markets. Princeton: Princeton University Press, 2010, 240 pp.
He argues that "the sociology of markets lacks a theory of social institutions" (p.
Since its revival in the early 1980s, the sociology of markets has stood in the long shadow of economics, especially the subfield of industrial organization.
Fligstein reminds us that market exchange does not exist in a vacuum, that states and firms are mutually dependent actors in producing markets, and that a comprehensive sociology of markets cannot be divorced from an underlying political sociology.
To explore why fashion matters geographically and why she and other geographers are interested in it, Crewe draws on five conceptual approaches: cultural economy, the economic sociology of markets, the object and its materiality and possession, performative practice, and scale or relation.
An Introduction to the Sociology of Markets (Oxford University Press 2009), among others.
Still, research in the sociology of markets may suggest that the outcome Burt uses to indicate successful use of structural autonomy may need to be investigated further to separate how much of what is happening fits into the economic price-setting model and how much fits into the sociological status-signaling model.