Behavioral Finance: Finance with Normal People
Borsa Istanbul Review, pp. 1-9, 2014
9 Pages Posted: 19 Jun 2014
Date Written: February 17, 2014
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: Suggested Citation