Behavioralizing Finance

Foundations and Trends in Finance, Vol. 4, Nos. 1-2, pp. 1-184, 2010

SCU Leavey School of Business Research Paper No. 10-01

187 Pages Posted: 2 May 2010  

Hersh Shefrin

Santa Clara University - Leavey School of Business

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Abstract

Finance is in the midst of a paradigm shift, from a neoclassical based framework to a psychologically based framework. Behavioral finance is the application of psychology to financial decision making and financial markets. Behavioralizing finance is the process of replacing neoclassical assumptions with behavioral counterparts. This monograph surveys the literature in behavioral finance, and identifies both its strengths and weaknesses. In doing so, it identifies possible directions for behavioralizing the frameworks used to study beliefs, preferences, portfolio selection, asset pricing, corporate finance, and financial market regulation. The intent is to provide a structured approach to behavioral finance in respect to underlying psychological concepts, formal framework, testable hypotheses, and empirical findings. A key theme of this monograph is that the future of finance will combine realistic assumptions from behavioral finance and rigorous analysis from neoclassical finance.

Keywords: behavioral finance, portfolio allocation, investor psychology, empirical finance, neoclassical finance, financial markets

JEL Classification: G00, G11, G14, G20, G30

Suggested Citation

Shefrin, Hersh, Behavioralizing Finance. Foundations and Trends in Finance, Vol. 4, Nos. 1-2, pp. 1-184, 2010; SCU Leavey School of Business Research Paper No. 10-01. Available at SSRN: https://ssrn.com/abstract=1597934

Hersh Shefrin (Contact Author)

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)

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