To provide a framework for understanding the implications of the decision-making process for financial market practitioners, throughout this reading we will use an approach developed by decision theorist, Howard Raiffa. Raiffa (1997) discusses three approaches to the analysis of decisions that provide a more accurate view of a “real” person’s thought process. He uses the terms normative analysi...

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In my work advising individuals on their investment strategies, I get somewhat of a front-row seat when it comes to observing behavioral investing in action. More than occasionally, I find myself explaining to a client why his or her desired course of action is likely to do more harm than good. But knowledge of market conditions and historical risk/return dynamics is hardly the sole determinant...

The efficient markets theory reached the height of its dominance in academic circles around the 1970s. Faith in this theory was eroded by a succession of discoveries of anomalies, many in the 1980s, and of evidence of excess volatility of returns. Finance literature in this decade and after suggests a more nuanced view of the value of the efficient markets theory, and, starting in the 1990s, a ...

There are many great ways to incorporate behavioral economics in a first-year undergraduate economics class—i.e., the course that is typically called “Principles of Economics.” Our preferred approach integrates behavioral economics throughout the course (e.g., see Acemoglu, Laibson, and List 2015). With the integrated approach, behavioral content plays a role in many of the chapters of the prin...

Behavioral Finance is an economic and scientific study on human behavior. It is a research done on social cognitive and emotional biases to understand economic decision and how they affect markets. The behavioral finance is mainly concerned with the human rationality and its practical aspects. This theory is a study of Human psychology and Economics. Behavioral finance is the upcoming study of ...

Evolutionary game theory classically investigates which behavioral patterns are evolutionarily successful in a single game. More recently, a number of contributions have studied the evolution of preferences instead: which subjective conceptualizations of a game’s payoffs give rise to evolutionarily successful behavior in a single game. Here, we want to extend this existing approach even further...

In this paper, we study the optimal portfolio selection problem of weakly informed traders in the sense of Baudoin [1]. Instead of considering only expected utility maximizers, we also take into consideration different preference paradigms. In particular, we analyze a representative agent who follows the tenets of cumulative prospect theory as developed by Kahneman and Tversky [15], together wi...

In our study, we tested whether average leverage level of sector and leverage level of sector leader are effective on capital structure decisions of selected firms and sectors listed in ISE. We depended on the Approach of Behavioral Finance to this matter as a supplementary approach of traditional finance to capital structure. In respect of its influence on leverage levels of the firms in four ...