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Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
i: incidental

Behavior

Behavioral analysis

See behavior

Behavioral asset pricing model (BAPM)

See behavioral financial analysis

Behavioral biases in finance / economics

See behavioral biases

pi-arrig.gif Behavioral corporate finance

See corporate behavior

Behavioral economics

See behavioral economics

 

Dates of related message(s) in the
Behavioral-Finance group
(*):

Year/month, d: developed / discussed,
i: incidental

Behavioral finance (BF)



Many messages in the BF group
(obviously!)
+ see behavioral
analysis, biases, EMH pricing,
utility...

Money dreams on the shrink's sofa.

Definition:

To put it simply, BF / Behavioral finance shows how we behave with
money
.

It can be further defined as the application of  individual and
and collective
psychology (*) to finance.

Here are the main phenomena on which BF focuses its attention:

How financial decisions (on investment for example) are taken,

What are their effects on financial activities.

Also the incidences on economic activities, through a sister branch of

knowledge - with common findings - behavioral economics (see that
phrase).

Actually, BF is interested in things that turn wrong, such 
as biases and anomalies
, and less in what could run smoothly
and efficiently, which is the standard economics quest for
equilibrium and smooth and fair allocation of resources.

It focuses mostly on - individual and collective, cognitive
and emotional - biases
that might affect those decisions,
and lead to:

* Suboptimal or damaging outcomes for the decider,

* More generally financial market anomalies (see that word).

(*) See also the "psychology" and "social psychology" articles.

BF combines therefore two branches of studies

Seeing the trees AND the forest.

Field of study

Explored
issues

Practical
research topics

Practical
objectives

Behavioral
finance

micro

(Psychological
BF or
Financial
psychology)

How investors,
borrowers
and
other players
make choices
and behave

when  money is
at stake.


Investigate
the
decision-
making
processes

and financial
consequences
for deciders.


Help
investors

overcome
their own
damaging
investing
biases.

 

Behavioral
finance

macro

aka

Quantitative BF


Effects on
financial
markets
of
collective
attitudes,
choices,
reactions and
behaviors.

To spot, in
market
statistics,
deviations
from

theoretical

"efficient"
prices and
returns.

To help
investors

benefit   -
and avoid
pitfalls -
in biased
market
behaviors.


Behavioral finance as a quest for market anomalies

Witch hunting? Or hygiene?

BF is interested in:

Mind processes linked to decisions that involve money.

It studies in what they differ from the canons of logic and self-
interest
that
are deemed rational in that area.

Those differences are attributed to what are labeled behavioral biases (see
above).

Their effects on financial markets, such as

prices and returns anomalies / inefficiencies.

In other words, behavioral finance recognizes that economic model are usually
too "mechanical" (even circular for some of them) to take fully into account the
human factor

More specifically, it tries to explain how and why actual market
prices and returns differ from what "standard finance"
predicts.

Standard finance / mainstream finance means here
chiefly the EMH-based models (see EMH), even if their relevancy is
more and more debated.

A practical objective is to help investors to

detect and understand those biases / anomalies
and use them in investment strategies (see behavioral analysis).

Weaknesses and limitations
     of Behavioral finance
(and Behavioral economics)

Is focusing on biases a reductive ...bias?


Although their relevancy is more and more accepted, still not everybody
considers BF/BE as fully scientific and practical fields.
Arguments are still exchanged for or against those bodies of knowledge.

The debate should not be based on the idea that BF/BE consider
economic players as always irrational, and markets as always
inefficient.

This is not what those disciplines state. They talk about

bounded rationality
and degrees of efficiency.

Anyway, BF/BE have some weaknesses and limitations.

The two main ones are their overemphases on:

Reactions to events

BF/BE might be overly focused on underreaction, overreaction,
misreaction
to events (*)

Maybe a sequel of "behaviorism" and its
"stimulus -
reaction" paradigm
seen as the source of all behaviors.


But far from this reductive approach we could ask:

Do self-generated intentions and goals (see those words), not
  
fully linked to what happens in the environment, also play a part in
   behaviors?

Why should investors act and adjust their opinion only when there 
    is a new event or information?

Are people brainless and armless in eventless situations?

What about noise trading, boredom (see those words) or
plain mental pauses to think things over?

Why consider that "rationality" or "normality" depends on
    such instant adjustments?

Is speed the only criterion of sound decisions?
How robotic! (see automaticity / autopilot bias)

(*) Well, this critic - about the exaggerated importance given to
     
reactions as the key criteria to judge rationality - addresses
      both the EMH and BF/BE.

Anomalies (or divergences) compared to standard finance.


BF/BE refers to some standard finance concepts (EMH...), for which the
main
criteria  of "normality" and wisdom in finance (and economics) were
the expected monetary returns and risks (the canons of
economic "utility", see that word).

This might be a reductive way to define the norm and thus to judge what is
anomalous.

Thus BF/BE add more questions 

What if those purported objective criteria were "too
    obvious"
(thus superficial
as a kind of availability heuristic)

to fit all realities?

Why any divergence from those two criteria should be
    considered a "market anomaly"?

What about uncertainty as a broader concept
   than statistical
risk? 

More important, why should those criteria be the
  
only "rational"
ones in economics and finance?

What about non monetary returns which
might
have their legitimacy also?

Empathy, fairness, fun, power, status, human challenge,
search
for experience and knowledge, and myriads of
other intentions and goals
, might be, at least to some
degree, as legitimate or wise as just monetary returns.

Therefore "multipurpose" finance (or multivalue
finance: see fuzzy logic) could be a key field of research.


Still a long path ahead towards understanding

      We still need to dig! And dig!


There are still many things to observe and study in those fields, and more
generally about what human and social sciences see as the reasons, processes
and effects of "decision making".

We can doubt there would ever be a fully predictive economic or financial
science or technique, as uncertainty  will not disappear.

Even so, BF is not totally enslaved to standard valuations models and their
"anomalies",it also devised some models on its own (see behavioral analysis).

Behavioral Finance might lack a general theory and
general
"laws".

But maybe this should not be taken as its purpose.

All the more as there is no general law of human and social

behavior.

To be more an "anti-theory" (against the EMH) than a self-standing theory
is considered as a limitation of Behavioral finance

But let us be philosophical: it just shows that

* Realities are a bit more complex, and resist a clear cut unifying theory.

* We may never end learning more and more about the human being
   and human societies. That quest started thousands of years ago!
   Maybe
that is why "Greeks" are so popular in financial theory

equations ;-)

What about the ethics ?

Behavioral economic / finance studies and findings are sometimes accused
of been used as tools of manipulation
.

This is quite reductive. To make an analogy, hands or feet can be used in evil
way, butit does not mean they are evil, and even less that they should not be
studied and understood.

But to know its findings can be on the contrary precious
to protect oneself against manipulation
(including self-manipulation).

This is the main purpose of that glossary by the way!

 

Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
i: incidental

Behavioral financial analysis (BA BFA)

This article has its own page

 

Behavioral (market) parameters

See behavioral financial analysis

Behavioral portfolio theory (BPT)

See behavioral financial analysis

Behavioral pricing

See behavioral financial analysis

Behavioral public economics / finance

See behavioral economics

Behavioral stock pricing model (BSPM), Behavioral valuation

See behavioral financial analysis

Behavioralist

See behavioral economics,
behavioral finance

Definition:

Behavioralist is a name sometimes given to a person who studies, uses or
promotes
behavioral finance and economics.

Its approach is not specially linked to a precise psychological or sociological
(or economic) school of thoughts.

It accepts any research tool and does not follow any specific ideology.

It is focused on economic and financial effects of human and social

behaviors and its analysis is open to any process that causes them.

A possible confusion


A behavioralist should not be confused with a "behaviorist",
an adept of the narrow psychological theory called "behaviorism".

A behaviorist states that all human actions take place in relation to the
"stimulus => reaction"
couple.

This animalistic knee-jerk paradigm is quite reductive as it:

Does not dig further into what happens in the black box between the input
   and the output.

Tends to neglect that a stimulus can be self-generated, not just a response

to some outside situation. Intentions (see that word) might override pure
reactions

Entrepreneur behavior

See entrepreneur

(*) To find those messages: reach that BF group and, once there,
      1) click "messages", 2) enter your query in "search archives".

Members of the Behavioral Finance Group,
 please vote on the glossary quality at
BF polls

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This page last update: 10/08/15   

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