Let me talk about my understanding: behavioral finance can be understood as:
Behavioral Finance = Traditional Financial Theory + Psychology (Cognitive Science).
Traditional financial theory is also known as neoclassical theory . One of its important assumptions is the rational person assumption : that people are rational when making decisions. Based on this assumption, it is derived that the market is also efficient (the efficient market hypothesis). Many mathematical models developed on this basis, such as capital asset pricing model CAPM, option pricing model, etc., have been widely used in the financial field.
However, the assumption of rational people does not reflect reality in many cases . For example, in the face of financial crises and financial bubbles, it is difficult to say that human behavior is rational. When it comes to studying these kinds of problems, traditional financial theory doesn’t work.
Some scholars have begun to try to incorporate psychology and behavior into the study of finance : such as the phenomenon of “herd effect” and “overconfidence” that exist in many people.
Scholars have found that incorporating these “human” factors into financial research can better explain real-world problems. In the past two decades, several behavioral economists, such as Robert Shiller (for “Irrational Exuberance”) and Richard Thaler (for “Nudge”), have won Nobel Prizes. From one aspect, it also reflects that behavioral finance is gradually being valued by the public.
In this sense, behavioral finance is actually a development and supplement to traditional financial theory , rather than a unique discipline.
I would recommend a few popular science books on behavioral finance that I think are better.
1. Thinking, Fast and Slow by Daniel Kahneman, 2011
Chinese translation: Thinking, Fast and Slow , by Daniel Kahneman (the author is the 2002 Nobel Laureate in Economics)
2. Misbehaving: The Making of Behavioral Economics by Richard H. Thaler, 2016
Chinese translation: “The “wrong” act by Richard Taylor (the author is the 2017 Nobel Laureate in Economics)
3. Nudge by Richard H. Thaler, 2009
Chinese translation: The Boost by Richard Taylor
4. The Winner’s Curse by Richard H. Thaler, 1994
Chinese translation: The Winner’s Curse by Richard Taylor
5. Irrational Exuberance by Robert J. Shiller, 2000
Chinese translation: Irrational Exuberance by Robert Shiller
By the way, a few well-known scholars of behavioral finance are introduced:
1. Daniel Kahneman (born March 5, 1934) is an Israeli-American psychologist. He was awarded the 2002 Nobel Prize in Economics for his contributions to prospect theory. Prospect theory holds that people usually think not from the perspective of wealth, but from the perspective of winning and losing, and are concerned about how much gain and loss are.
2. Richard H. Thaler, in behavioral finance, Thaler studies the impact of people’s bounded rational behavior on financial markets, and has made many important contributions. Thaler’s academic point of view is that a completely rational economic person cannot exist, and people’s various economic behaviors in real life will inevitably be affected by various “irrational”. Many behaviors that are considered “wrong” from the perspective of traditional economics are often overlooked, but it is often these behaviors that cause those “beautiful” decisions to eventually fail and even lead to bad results. In 1980, Thaler proposed the endowment effect (also known as the endowment effect): it refers to the fact that once a person owns an item, his evaluation of the value of the item increases significantly compared to before he owns it.
3. Robert J. Shiller, Yale University, 2013 Nobel Prize in Economics for “Contributions in Empirical Analysis of Asset Prices”. Reasons for award: Important contributions in the field of empirical analysis of asset pricing.
4. Amos Tversky (March 16, 1937 – June 2, 1996), with his collaborator Daniel Kahneman, won the 2002 Nobel Prize in Economics.
Source: Zhihu www.zhihu.com
Author: Yao Kai
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Further reading:
What are the theoretical gaps in behavioral finance?
Behavioral Finance Perspectives?
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