Unformatted text preview: avioural finance applies scientific research on cognitive and emotional biases to better understand
financial decisions. Cognitive refers to how people think. Thus, behavioural finance emerges from a large
psychology literature documenting that people make systematic errors in the way that they think: they are
overconfident, they put too much weight on recent experience, etc.
In addition, behavioural finance considers limits to arbitrage. Even though misevaluations of financial
assets are common, not all of them can be arbitraged away. In the absence of such limits a rational
investor would arbitrage away price inefficiencies, leave prices in a non-equilibrium state for protracted
periods of time. Download free ebooks at bookboon.com
54 Corporate Finance Market efﬁciency Behavioural finance might help us to understand some of the apparent anomalies. However, critics say it
is too easy to use psychological explanations whenever there something we do not understand. Moreover,
critics contend that behavioural finance is more a collection of anomalies tha...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.
- Spring '12