A Survey of Behavioral Finance
Yale School of Management; National Bureau of Economic Research (NBER)
Richard H. Thaler
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Behavioral finance argues that some financial phenomena can plausibly be understood using models in which some agents are not fully rational. The field has two building blocks: limits to arbitrage, which argues that it can be difficult for rational traders to undo the dislocations caused by less rational traders; and psychology, which catalogues the kinds of deviations from full rationality we might expect to see. We discuss these two topics, and then present a number of behavioral finance applications: to the aggregate stock market, to the cross-section of average returns, to individual trading behavior, and to corporate finance. We close by assessing progress in the field and speculating about its future course.
Number of Pages in PDF File: 77
Keywords: behavioral finance, market efficiency, limits to arbitrage, psychology, investor behavior
JEL Classification: G11, G12, G30
Date posted: October 4, 2002
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