Behavioral Decision-Making in Finance: An Overview and Assessment of Selected Research

Revista Española de Financiación y Contabilidad (Spanish Journal of Finance and Accounting), Vol. 42, 157, 99-118, January-March 2013

20 Pages Posted: 19 Mar 2013 Last revised: 11 Apr 2013

See all articles by Werner F.M. DeBondt

Werner F.M. DeBondt

DePaul University - Driehaus Center for Behavioral Finance

Rosa M. Mayoral

University of Valladolid

Eleuterio Vallelado

University of Valladolid; University of Valladolid

Date Written: November 18, 2012

Abstract

Everyday financial decisions are the product of diverse factors, including instinct, habit, emotion, reason, and social interaction. Psychologists have long aspired to unravel the determinants of intuitive judgment and choice. Slowly but surely, they have identified various psychological mechanisms that cause predictable decision biases. This survey puts special emphasis on behavioral research in finance that investigates information overload, emotion, social influence, and ambiguity aversion. It also discusses selected cognitive models that attempt to integrate the way individuals interpret and act upon information. In general, behavioral research casts serious doubts on the validity of some of the key insights of mainstream finance such as portfolio theory, the positive risk-return trade-off, and efficient markets.

Keywords: behavioral finance, decision making, cognitive bias, emotional bias, social interaction, ambiguity

JEL Classification: G02, G11, G14

Suggested Citation

DeBondt, Werner F.M. and Mayoral, Rosa M. and Vallelado, Eleuterio, Behavioral Decision-Making in Finance: An Overview and Assessment of Selected Research (November 18, 2012). Revista Española de Financiación y Contabilidad (Spanish Journal of Finance and Accounting), Vol. 42, 157, 99-118, January-March 2013. Available at SSRN: https://ssrn.com/abstract=2234989

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)

Rosa M. Mayoral

University of Valladolid ( email )

Avda. Valle Esgueva 6
Valladolid, 47011
Spain
+34 983 42 33 34 (Phone)
+34 983 18 64 84 (Fax)

Eleuterio Vallelado (Contact Author)

University of Valladolid ( email )

Avda. Valle Esgueva 6
47011 Valladolid, 47011
Spain
983423387 (Phone)
983186484 (Fax)

HOME PAGE: http://eleuteriovallelado.blogs.uva.es/

University of Valladolid ( email )

8 C/Plaza de Santa Cruz
Valladolid, Valladolid 47002
Spain
+34983423387 (Phone)

HOME PAGE: http://eleuteriovallelado.blogs.uva.es/

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