behavioural finance
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by
Steven
N.
Durlauf
and
Lawrence
E.
Blume
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Abstract
Behavioural finance began as an attempt to understand why financial markets react inefficiently to public information. One stream of behavioural finance examines how psychological forces induce traders and managers to make suboptimal decisions, and how these decisions affect market behaviour. Another stream examines how economic forces might keep rational traders from exploiting apparent opportunities for profit. Behavioural finance remains controversial, but will become more widely accepted if it can predict deviations from traditional financial models without relying on too many ad hoc assumptions, and expand to settings (particularly corporate finance) in which arbitrage forces are weaker.
Keywords
accruals anomaly; anomalies; arbitrage; behavioural finance; book-to-market effect; capital asset pricing model; efficient markets hypothesis; equity premium puzzle; gambler's fallacy; home bias puzzle; hot-hand fallacy; incomplete revelation hypothesis; limited attention; market microstructure; momentum; miscalibration; mispricing; overconfidence; pattern recognition; post-earnings-announcement drift; prospect theory; reversal; risk; size effect
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How to cite this article
Bloomfield, Robert. "behavioural finance." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 25 May 2013 <http://www.dictionaryofeconomics.com/article?id=pde2008_B000339> doi:10.1057/9780230226203.0116

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