Behavioral Finance

69 Pages Posted: 15 Aug 2014 Last revised: 1 Oct 2014

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: August 15, 2014

Abstract

Behavioral finance studies the application of psychology to finance, with a focus on individual-level cognitive biases. I describe here the sources of judgment and decision biases, how they affect trading and market prices, the role of arbitrage and flows of wealth between more rational and less rational investors, how firms exploit inefficient prices and incite misvaluation, and the effects of managerial judgment biases. There is need for more theory and testing of the effects of feelings on financial decisions and aggregate outcomes. Especially, the time has come to move beyond behavioral finance to "social finance", which studies the structure of social interactions, how financial ideas spread and evolve, and how social processes affect financial outcomes.

Keywords: Investor psychology, heuristics, overconfidence, attention, feelings, reference dependence, social finance

JEL Classification: G02

Suggested Citation

Hirshleifer, David A., Behavioral Finance (August 15, 2014). Available at SSRN: https://ssrn.com/abstract=2480892 or http://dx.doi.org/10.2139/ssrn.2480892

David A. Hirshleifer (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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