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The subject of overreactions has also been important in behavioral finance. In his 2006 PhD thesis, [7] Duran examined 130,000 data points of daily prices for closed-end funds in terms of their deviation from the net asset value (NAV). Funds exhibiting a large deviation from NAV were likely to behave in the opposite direction of the subsequent day.
One detailed application of mental accounting, the Behavioral Life Cycle Hypothesis posits that people mentally frame assets as belonging to either current income, current wealth or future income and this has implications for their behavior as the accounts are largely non-fungible and marginal propensity to consume out of each account is different.
Behavioral finance [74] is the study of the influence of psychology on the behavior of investors or financial analysts. It assumes that investors are not always rational , have limits to their self-control and are influenced by their own biases . [ 75 ]
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Explanations of money illusion generally describe the phenomenon in terms of heuristics.Nominal prices provide a convenient rule of thumb for determining value and real prices are only calculated if they seem highly salient (e.g. in periods of hyperinflation or in long term contracts).
Prof. Aswath Damodaran – financial theory, with a focus in Corporate Finance, Valuation and Investments. Updated Data, Excel Spreadsheets. Web Sites for Discerning Finance Students (Prof. John M. Wachowicz) -Links to finance web sites, grouped by topic; studyfinance.com – introductory finance web site at the University of Arizona
Since then the acceptability, recognition, role, and methods of experimental economics have evolved. From the early 1980s on a similar pattern emerged in experimental finance. [4] The foundational work in experimental finance was the work of Forsythe, Palfrey and Plott (1980), [5] Plott and Sunder (1982), [6] and Smith, Suchanek and Williams ...
Studies in behavioral finance analyzed this pattern, observing that there is a tendency to avoid high-reward options in the market, as the risk of short-term loss potentially influences the broker. Acclaimed behavioral economists Benartzi and Thaler analyzed this concept, calling it the "equity premium puzzle [ 2 ] ."