Behavioural Finance: Quo Vadis?
Journal of Applied Finance, Vol.19, pp.7-21, 2008
Posted: 26 Nov 2008 Last revised: 1 Nov 2009
Date Written: November 24, 2008
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: Suggested Citation