Behavioralizing Finance

186 Pages Posted: 15 Jun 2010

See all articles by Hersh Shefrin

Hersh Shefrin

Santa Clara University - Leavey School of Business

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Date Written: June 14, 2010

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 volume 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 the volume is that the future of finance will combine realistic assumptions from behavioral finance and rigorous analysis from neoclassical finance.

Keywords: behavioral finance, asset pricing, portfolio selection, corporate finance, financial market regulation

Suggested Citation

Shefrin, Hersh, Behavioralizing Finance (June 14, 2010). Foundations and Trends in Finance, Vol. 4, No. 1-2, pp. 1-84, 2009. Available at SSRN: https://ssrn.com/abstract=1624948

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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