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behavioral finance - K hoa Nguyen 1 Khoa Nguyen Fin 390...

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Khoa Nguyen 1 Khoa Nguyen Fin 390 Prof. David Kesler 02/10/2011 Behavioral Finance Nowadays, in order to reasonably predict the performance of the stock market and sensibly assess reactions of investors to risk and fluctuations, many researchers have been creating a new field called behavioral finance. This field of finance proposes psychology- based theories to explain stock market anomalies. Within behavioral finance, it is assumed that the information structure and the characteristics of market participants systematically influence individuals' investment decisions as well as market outcomes. In fact, some behavioral economists believe that when it comes to making decisions about money, the human mind often behaves irrationally. This notion really challenges the dominant economic and financial theories that have shaped policy in business and government for the last five decades. For example, behavioral finance theories seem to contrast with the Efficient Market Hypothesis (EMH). “The EMH argues that competition between investors seeking abnormal profits drives prices to their “correct” value.” (Ritter,
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