Behavioral Finance: Finance with Normal People

Borsa Istanbul Review, pp. 1-9, 2014

9 Pages Posted: 19 Jun 2014

See all articles by Meir Statman

Meir Statman

Santa Clara University - Department of Finance

Date Written: February 17, 2014

Abstract

Behavioral finance is under construction as a solid structure of finance. It incorporates parts of standard finance, replaces others, and includes bridges between theory, evidence, and practice.

Behavioral finance substitutes normal people for rational people in standard finance. It substitutes behavioral portfolio theory for mean-variance portfolio theory, and behavioral asset pricing model for the CAPM and other models where expected returns are determined only by risk. Behavioral finance also distinguishes rational markets from hard-to-beat markets in the discussion of efficient markets, a distinction that is often blurred in standard finance, and it examines why so many investors believe that it is easy to beat the market.

Moreover, behavioral finance expands the domain of finance beyond portfolios, asset pricing, and market efficiency and is set to continue that expansion while adhering to the scientific rigor introduced by standard finance.

Keywords: behavioral finance, asset pricing models, portfolio theory, efficient market hypothesis

JEL Classification: G1

Suggested Citation

Statman, Meir, Behavioral Finance: Finance with Normal People (February 17, 2014). Borsa Istanbul Review, pp. 1-9, 2014. Available at SSRN: https://ssrn.com/abstract=2455991

Meir Statman (Contact Author)

Santa Clara University - Department of Finance ( email )

500 El Camino Real
Santa Clara, CA 95053
United States
408-554-4147 (Phone)
408-554-4029 (Fax)

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