Behavioral Finance

Catalog description

The field of Behavioral Finance uses psychology to explain anomalies that we observe in the financial markets—investment behavior that are not consistent with the classical economic models of rational decision-making. In behavioral models, we recognize that individuals (and markets) may behave irrationally, sometimes for extended periods of time. Using some of the more popular and accepted theories of human behavior from the fields of psychology and decision-making, we will characterize some prevalent features of irrational behavior in the financial markets. We will discuss typical errors made by financial market participants as a result of behavioral biases, and examine the extent to which irrationality can affect financial markets at the aggregate level ('bubbles'), how long irrationality may persist, and what factors will eventually cause these bubbles to burst ('crashes'). 001576