Modern Finance vs. Behavioural Finance: An Overview of Key Concepts and Major Arguments
University of Coventry
June 1, 2007
The ICFAI Journal of Behavioural Finance, Vol. 4, No. 2, pp. 53-70, 2007
Modern Finance has dominated the area of financial economics for at least four decades. Based on a set of strong but highly unrealistic assumptions its advocates have produced a range of very influential theories and models. Nonetheless, in the last two decades a new academic school of thought has emerged that refutes the key assumption of a “homo economicus”; an assumption that represents the cornerstone for the development of the theory of efficient markets. The first empirical evidence against efficient markets in the mid-eighties signalled the beginning of a “fierce” debate between these two schools of thought. This paper gives an overview of the key arguments of these two distinctive academic doctrines.
Keywords: Behavioural Finance, Market Efficiency, Over-reaction, Under-reaction
JEL Classification: G11, G12, G14
Date posted: September 17, 2010