Conventional finance is based on the theories which describe people for the most part behave logically and rationally. People started to question this point of view as there have been anomalies, which are events that conventional finance has a difficult
It can be difficult to encounter something or someone without having a preconceived opinion. This first impression can be hard to shake because people also tend to selectively filter and pay more attention to information that supports th
When it comes to probability, a lack of understanding can lead to incorrect assumptions and predictions about the onset of events. One of these incorrect assumptions is called the gambler's fallacy.
In the gambler's fallacy, an individu
One of the most infamous financial events in recent memory would be the bursting of the internet bubble. However, this wasn't the first time that events like this have happened in the markets. How could something so catastrophic be allowed
Continued-However, anomalies such as the winner's curse - a tendency for the
winning bid in an auction setting to exceed the intrinsic value of the item
purchased - suggest that this is not the case.
Rational-based theories assume that all participants in
Traditionally, it is believed the net effect of the gains and losses
involved with each choice are combined to present an overall
evaluation of whether a choice is desirable. Academics tend to use
"utility" to describe enjoyment and conten
Like every other branch of finance, the field of behavioral finance has certain people that have provided major theoretical and empirical contributions. The following section provides a brief introduction to three of the biggest nam
Why is Behavioural Finance Necessary?
When using the labels "conventional" or "modern" to describe finance, we are talking about the type of finance that is based on rational and logical theories, such as the capital asset pricing model (CAPM) and the eff
The presence of regularly occurring anomalies in conventional
economic theory was a big contributor to the formation of behavioral
finance. These so-called anomalies, and their continued existence,
directly violate modern fin
A field of finance that proposes psychology-based theories to explain stock market anomalies. Within behavioural finance, it is assumed that the information structure and the characteristics of market participants systematically influen