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Behavioral Finance attempts to explain the reasoning patterns of investors and measures the influential power of these patterns on the investor's decision making. The central issue in behavioral finance is explaining why market participants make irrational systematic errors contrary to assumption of rational market participants. [1]
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]." This puzzle refers to the ...
Behavioral finance theory attributes stock market bubbles to cognitive biases that lead to groupthink and herd behavior. Bubbles occur not only in real-world markets, with their inherent uncertainty and noise, but also in highly predictable experimental markets. [ 1 ]
The prospect theory can explain such phenomena as people who prefer not to deposit their money in a bank, even though they would earn interest, or people who choose not to work overtime because they would have to pay higher taxes. It also plainly underlies the disposition effect.
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.
The Barnewall Two-way Model, also known as the Barnewall Two-way Behavioral Model, is an investor psychographic profiling model. [ 1 ] [ 2 ] [ 3 ] The Barnewall Two-way model was initially conceptualized and proposed by Marilyn MacGruder Barnewall in 1987 in an academic paper titled Psychological Characteristics of the individual investor.
In psychology and behavioral economics, the endowment effect, also known as divestiture aversion, is the finding that people are more likely to retain an object they own than acquire that same object when they do not own it.
Behavioral finance has produced several generalized expected utility theories to account for instances where people's choices deviate from those predicted by expected utility theory. These deviations are described as " irrational " because they can depend on the way the problem is presented, not on the actual costs, rewards, or probabilities ...