Behavioral Finance

Behavioral finance studies the application of psychology to finance, with a focus on individual-level cognitive biases. I describe here the sources of judgment and decision biases, how they affect trading and market prices, the role of arbitrage and flows of wealth between more rational and less rat...

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Bibliographic Details
Published inAnnual review of financial economics Vol. 7; no. 1; pp. 133 - 159
Main Author Hirshleifer, David
Format Journal Article
LanguageEnglish
Published Annual Reviews 01.01.2015
Subjects
attention
feelings
heuristics
investor psychology
overconfidence
reference dependence
social finance
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Summary:Behavioral finance studies the application of psychology to finance, with a focus on individual-level cognitive biases. I describe here the sources of judgment and decision biases, how they affect trading and market prices, the role of arbitrage and flows of wealth between more rational and less rational investors, how firms exploit inefficient prices and incite misvaluation, and the effects of managerial judgment biases. There is a need for more theory and testing of the effects of feelings on financial decisions and aggregate outcomes. Especially, the time has come to move beyond behavioral finance to social finance, which studies the structure of social interactions, how financial ideas spread and evolve, and how social processes affect financial outcomes.
ISSN:1941-1367
1941-1375
DOI:10.1146/annurev-financial-092214-043752