Behavioural Finance: Quo Vadis?

Journal of Applied Finance, Vol.19, pp.7-21, 2008

Posted: 26 Nov 2008 Last revised: 1 Nov 2009

See all articles by Werner F.M. DeBondt

Werner F.M. DeBondt

DePaul University - Driehaus Center for Behavioral Finance

Hersh Shefrin

Santa Clara University - Leavey School of Business

Yaz Gulnur Muradoglu

Queen Mary University of London; City University London - Sir John Cass Business School

Sotiris K. Staikouras

City University - Cass Business School; ALBA Graduate Business School

Date Written: November 24, 2008

Abstract

Behavioral finance endeavors to bridge the gap between neoclassical finance and cognitive psychology. Now an established field, behavioral finance looks at the investors' decision making formula as well as at their behavior, which in turn sheds light on the observed departures from the traditional finance theory. The paper provides an overarching view of the behavioral finance area. It begins by reviewing a few fundamental questions and lead slowly to the future of behavioral finance. The study unveils the move from the traditional approach that decision making is based on rational individuals using all available information, to including heuristics and biases as the background for framing choices under uncertainty. A new class of asset pricing models is put forward as a solution to overcome the obstacles of the neoclassical finance paradigm. The behavioral element is central to the new proposition without disputing the value of the traditional approach. It is suggested that with all its strengths and weaknesses the new paradigm will combine the best of neoclassical and behavioral elements.

Keywords: Behavioral finance, Neoclassical finance, Asset valuation, Behavioral SDF-based pricing

JEL Classification: G10, G12, G20

Suggested Citation

DeBondt, Werner F.M. and Shefrin, Hersh and Muradoglu, Yaz Gulnur and Staikouras, Sotiris, Behavioural Finance: Quo Vadis? (November 24, 2008). Journal of Applied Finance, Vol.19, pp.7-21, 2008. Available at SSRN: https://ssrn.com/abstract=1306730

Werner F.M. DeBondt

DePaul University - Driehaus Center for Behavioral Finance ( email )

1 East Jackson Boulevard
Suite 6123/6124
Chicago, IL 60604-2287
United States
312-362-8394 (Phone)

Hersh Shefrin

Santa Clara University - Leavey School of Business ( email )

Dept. of Finance
Santa Clara, CA 95053
United States
408-554-6893 (Phone)
408-554-4029 (Fax)

Yaz Gulnur Muradoglu

Queen Mary University of London ( email )

Francis Bancroft Building
Mile End Road
London, E1 4NS
United Kingdom

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 0124 (Phone)
+44 20 7040 8853 (Fax)

Sotiris Staikouras (Contact Author)

City University - Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

ALBA Graduate Business School ( email )

Athinas Ave. & 2A Areos Str.
Vouliagmeni 166 71, Athens
Greece

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