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
Date Written: November 18, 2012
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: Suggested Citation