Behavioral Finance

Posted: 11 Dec 2015

See all articles by David A. Hirshleifer

David A. Hirshleifer

Marshall School of Business, USC; University of California, Irvine - Paul Merage School of Business; National Bureau of Economic Research (NBER)

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Date Written: December 2015

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 a 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.

Suggested Citation

Hirshleifer, David A. and Hirshleifer, David A., Behavioral Finance (December 2015). Annual Review of Financial Economics, Vol. 7, pp. 133-159, 2015, Available at SSRN: https://ssrn.com/abstract=2702331 or http://dx.doi.org/10.1146/annurev-financial-092214-043752

David A. Hirshleifer (Contact Author)

Marshall School of Business, USC ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

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

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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