Thus behavioural finance emerges from a large

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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.

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