What is Behavioral Finance?

Business, Education & Technology Journal, Vol. 2, No. 2, pp. 1-9, Fall 2000

9 Pages Posted: 9 Mar 2001 Last revised: 27 Nov 2008

Victor Ricciardi

Goucher College - Department of Business Management

Helen K. Simon

Florida International University (FIU) - Department of Finance; Personal Business Management Services, LLC

Abstract

While conventional academic finance emphasizes theories such as Modern Portfolio Theory (MPT) and the Efficient Market Hypothesis (EMH), the emerging field of behavioral finance investigates the cognitive factors and emotional issues that impact the decision-making process of individuals, groups, and organizations. This paper presents an introduction to some general principles of behavioral finance including: overconfidence, cognitive dissonance, regret theory, and prospect theory. Also, this article provides strategies to assist individuals to resolve these mental errors and emotional pitfalls by recommending some important investment approaches for those who invest in stocks and mutual funds.

Note: This paper serves as a very good introductory reading for an undergraduate class in finance and economics.

Keywords: Behavioral Finance, Behavioural Finance, Behavioral Economics, Overconfidence, Financial Cognitive Dissonance, Regret Theory, Prospect Theory, Undergraduate, Graduate, Education, Students, Psychology, Overview, Introduction

JEL Classification: A12, G00, G14

Suggested Citation

Ricciardi, Victor and Simon, Helen K., What is Behavioral Finance?. Business, Education & Technology Journal, Vol. 2, No. 2, pp. 1-9, Fall 2000. Available at SSRN: https://ssrn.com/abstract=256754

Victor Ricciardi (Contact Author)

Goucher College - Department of Business Management ( email )

1021 Dulaney Valley Road
Baltimore, MD 21204-2794
United States
410-337-6291 (Phone)

HOME PAGE: http://www.amazon.com/Investor-Behavior-Psychology-Financial-Investing/dp/1118492986

Helen K. Simon

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Personal Business Management Services, LLC ( email )

3242 NW 22 Avenue
Fort Lauderdale, FL 33309
United States

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