Behavioral finance

Despite strong evidence that securities markets are highly efficient, there have been scores of studies that have documented long-term historical phenomena in securities markets that contradict the efficient market hypothesis and cannot be captured plausibly in models based on perfect investor rationality. Such phenomena are often referred to as stock market anomalies.

Behavioral finance is a discipline within the field of finance which seeks for psychology-based theories to explain such anomalies. Within the behavioral finance paradigm it is assumed that the information structure and the characteristics of market participants systematically influence their investment decisions as well as market outcomes.

See also: base-rate fallacy, behavioral economics, bounded rationality, cognitive dissonance, efficient capital market, framing effect, hindsight bias, overconfidence, rational behavior

Literature: Publications of the Behavioral Finance Group at the University of Mannheim, DeBondt & Thaler (1995), Shiller (1997)

Entry by: Andreas Laschke

November 17, 1997
Direct questions and comments to: Glossary master