behavioral finance research proposal

• Harvard Business School →
• Behavioral Finance & Financial Stability →

Invisible Primes: Fintech Lending with Alternative Data

Stock market stimulus, loan types and the bank lending channel, predictable financial crises, segmented arbitrage, business credit programs in the pandemic era, large banks and small firm lending, bank balance sheet constraints and bond liquidity, diagnostic bubbles, the cross-section of bank value, rate-amplifying demand and the excess sensitivity of long-term rates, can policy tame the credit cycle, real credit cycles, sizing up corporate restructuring in the covid crisis, overreaction in macroeconomic expectations.

Leverage and the Beta Anomaly

The pass-through of uncertainty shocks to households, stock market returns and consumption, monetary policy and global banking, a quantity-driven theory of term premia and exchange rates, u.s. monetary policy and emerging market credit cycles, weak credit covenants, financial market risk perceptions and the macroeconomy, how quantitative easing works: evidence on the refinancing channel.

The Relevance of Broker Networks for Information Diffusion in the Stock Market

Do banks have an edge, brokers and order flow leakage: evidence from fire sales, reflexivity in credit markets.

Partial Deregulation and Competition: Effects on Risky Mortgage Origination

Do fire sales create externalities, asset price dynamics in partially segmented markets.

A Crisis of Beliefs: Investor Psychology and Financial Fragility

• SUMMER 2018

The Impact of Pensions and Insurance on Global Yield Curves

Pension Policy and the Financial System

Rethinking stabilization policy: evolution or revolution.

Strengthening and Streamlining Bank Capital Regulation

Interest Rate Conundrums in the Twenty-First Century

The Decline of Big-Bank Lending to Small Business: Dynamic Impacts on Local Credit and Labor Markets

The Cross Section of Bank Value

Bubbles for Fama

The Fed, the Bond Market, and Gradualism in Monetary Policy

• BFFS WP #010

The Financial Regulatory Reform Agenda in 2017

• BFFS WP #009

Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold?

• BFFS WP #008

Rethinking Operational Risk Capital Requirements

• BFFS WP #006

Credit Migration and Covered Interest Rate Parity

• BFFS WP #007

The Federal Reserve's Balance Sheet as a Financial-Stability Tool

Low Interest Rates and Risk Taking: Evidence from Individual Investment Decisions

• BFFS WP #005

The Importance of Unemployment Insurance as an Automatic Stabilizer

A Model of Credit Market Sentiment

• BFFS WP #002

Diagnostic Expectations and Credit Cycles

• BFFS WP #003

Expectations and Investment

Neglected Risks: The Psychology and Financial Crises

• BFFS WP #004

The Private Costs of Highly Levered Banks

Does Reserve Accumulation Crowd Out Investment

Connectedness and Contagion

Secular Stagnation in the Open Economy

Covenant-Light Contracts and Creditor Coordination

• 31 MAR 2016

Global Cycles: Capital Flows, Commodities, and Sovereign Defaults, 1815-2015

Forward Guidance and the Yield Curve: Short Rates versus Bond Supply

• 07 DEC 2015

Extrapolation and Bubbles

The Pitfalls of External Dependence: Greece, 1829-2015

Dollar Funding and the Lending Behavior of Global Banks

A Comparative Advantage Approach to Government Debt Maturity

Liquidity Transformation in Asset Management: Evidence from the Cash Holdings of Mutual Funds

• 21 JUL 2015 |
• BFFS WP #001

The Antecedents and Aftermath of Financial Crises

Sovereign Debt Relief and its Aftermath

Monetary Policy Drivers of Bond and Equity Risks

Public Debt Overhangs: Advanced-Economy Episodes since 1800

• SUMMER 2012

Who Neglects Risk? Investor Experience and the Credit Boom

• 19 MAY 2015

The Stock Market and Bank Risk Taking

Credit Market Sentiment and the Business Cycle

Financial Crises, Development, and Growth: A Long-Term Perspective

• 24 APR 2015

Dealing with Debt

• 09 JAN 2015

Reforming LIBOR and Other Financial Market Benchmarks

Banks as Patient Fixed Income Investors

An Evaluation of Money Market Reform Proposals

Vulnerable Banks

Expectations of Returns and Expected Returns

• 11 JAN 2014

Reaching for Yield in the Bond Market

• 12 OCT 2013

Issuer Quality and Corporate Bond Returns

Do Strict Capital Requirements Raise the Cost of Capital?

Frictions in Shadow Banking: Evidence from the Lending Behavior of Money Market Funds

• 02 FEB 2013

The Growth of Finance

• SPRING 2013

Comovement and Predictability Relationships between Bonds and the Cross-Section of Stocks

• 16 MAR 2012

Monetary Policy as Financial Stability Regulation

Global, Local, and Contagious Investor Sentiment

A Model of Shadow Banking

The Liquidation of Government Debt

Neglected Risks, Financial Innovation, and Financial Fragility

Investor Sentiment and the Cross Section of Stock Returns

• International Center for Finance
• Research & Initiatives

Behavioral Finance Research

The International Center for Finance is a leading center for research in behavioral science – specifically, research in the fields of behavioral decision-making, behavioral economics, and behavioral finance. Behavioral decision-making studies the basic psychology of decision-making, while behavioral economics and behavioral finance study the role of irrational thinking in economic and financial decision-making, respectively. Yale’s research efforts in these fields have been helped immeasurably by the generous support of the Lynne & Andrew Redleaf Foundation (formerly Whitebox Advisors).

Yale Summer School in Behavioral Finance

The Yale Summer School in Behavioral Finance, which has been led since its inception in 2009 by Nicholas Barberis with support from the ICF’s outstanding staff members, is a one-week intensive course in behavioral finance for PhD students.

Lynne & Andrew Redleaf Foundation Student Fellows

Lynne & Andrew Redleaf Foundation Student Fellows (formerly Whitebox Advisors student fellows) are selected by a committee of Yale faculty and receive funding to help with their research.

Behavioral Research Projects

Behavioral research projects funded with the generous support of the Lynne & Andrew Redleaf Foundation (formerly Whitebox Advisors) that have been published either in journals or as working papers.

Lynne & Andrew Redleaf Foundation Graduate Student Conference

Since 2005, the annual Lynne & Andrew Redleaf Foundation Graduate Student Conference (formerly the Whitebox Advisors Graduate Student Conference) , held in conjunction with the Behavioral Science Conference, draws top doctoral students from around the world to present their research in the fields of behavioral economics, behavioral finance and behavioral marketing. The goal of the conference is to foster an environment to promote interaction amongst doctoral student researchers, and to provide feedback for students presenting their work in these fields.

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Review of Behavioral Finance

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Visit the ScholarOne support centre  for further help and guidance.

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While all journals work to different timescales, the goal is that the editor will inform you of their first decision within 60 days.

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Emerald’s manuscript transfer service takes the pain out of the submission process if your manuscript doesn’t fit your initial journal choice. Our team of expert Editors from participating journals work together to identify alternative journals that better align with your research, ensuring your work finds the ideal publication home it deserves. Our dedicated team is committed to supporting authors like you in finding the right home for your research.

If a journal is participating in the manuscript transfer program, the Editor has the option to recommend your paper for transfer. If a transfer decision is made by the Editor, you will receive an email with the details of the recommended journal and the option to accept or reject the transfer. It’s always down to you as the author to decide if you’d like to accept. If you do accept, your paper and any reviewer reports will automatically be transferred to the recommended journals. Authors will then confirm resubmissions in the new journal’s ScholarOne system.

Our Manuscript Transfer Service page has more information on the process.

If your submission is accepted

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Once your paper is accepted, you will have the opportunity to indicate whether you would like to publish your paper via the gold open access route.

If you’ve chosen to publish gold open access, this is the point you will be asked to pay the APC (article processing charge).  This varies per journal and can be found on our APC price list or on the editorial system at the point of submission. Your article will be published with a Creative Commons CC BY 4.0 user licence , which outlines how readers can reuse your work.

For UK journal article authors - if you wish to submit your work accepted by Emerald to REF 2021, you must make a ‘closed deposit’ of your accepted manuscript to your respective institutional repository upon acceptance of your article. Articles accepted for publication after 1st April 2018 should be deposited as soon as possible, but no later than three months after the acceptance date. For further information and guidance, please refer to the REF 2021 website.

All accepted authors are sent an email with a link to a licence form.  This should be checked for accuracy, for example whether contact and affiliation details are up to date and your name is spelled correctly, and then returned to us electronically. If there is a reason why you can’t assign copyright to us, you should discuss this with your journal content editor. You will find their contact details on the editorial team section above.

Proofing and typesetting

Once we have received your completed licence form, the article will pass directly into the production process. We will carry out editorial checks, copyediting, and typesetting and then return proofs to you (if you are the corresponding author) for your review. This is your opportunity to correct any typographical errors, grammatical errors or incorrect author details. We can’t accept requests to rewrite texts at this stage.

When the page proofs are finalised, the fully typeset and proofed version of record is published online. This is referred to as the EarlyCite version. While an EarlyCite article has yet to be assigned to a volume or issue, it does have a digital object identifier (DOI) and is fully citable. It will be compiled into an issue according to the journal’s issue schedule, with papers being added by chronological date of publication.

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Need to make a change to the author list? See our frequently asked questions (FAQs) below.

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Editor-in-Chief

• Gulnur Muradoglu Queen Mary University of London - UK [email protected]

Associate Editors

• Ylva Baeckstrom King’s Business School, King’s College London - UK [email protected]
• Deven Bathia Queen Mary University of London - UK [email protected]
• Darren Duxbury Newcastle University - UK [email protected]
• Kristina Vasileva University of Westminster - UK [email protected]

Advisory Editor

• Werner DeBondt DePaul University - USA
• John Doukas Old Dominion University - USA
• David Hillier University of Strathclyde - UK
• Alok Kumar University of Miami - USA
• Hersh Shefrin Santa Clara University - USA
• Meir Statman Santa Clara University - USA
• Avanidhar Subrahmanyam UCLA Anderson School of Management - USA

Commissioning Editor

• Sophie Reckless Emerald Publishing - UK [email protected]

Journal Editorial Office (For queries related to pre-acceptance)

• Nikita Singh Emerald Publishing [email protected]

Supplier Project Manager (For queries related to post-acceptance)

• Suryalakshmi Balakrishnan Emerald Publishing [email protected]

Editorial Board

• Panagiotis Andrikopoulos Coventry University - UK
• Stelios Bekiros European University Institute, Italy and IPAG Business School - France
• Marie-Hélène Broihanne Strasbourg University - France
• Chris Brooks University of Reading - UK
• Stephen Y. L. Cheung Hong Kong Baptist University - People's Republic of China
• Jerry Coakley University of Essex - UK
• Mike Dempsey RMIT University - Australia
• Robert Durand Curtin University - Australia
• Catherine D’Hondt UCLouvain - Belgium
• Fotini Economou Centre of Planning and Economic Research (KEPE) - Greece
• Manapol Ekkayokkaya Chulalongkorn University - Thailand
• Robert Faff Bond University - Australia
• Emilios Galariotis Audencia Nantes School of Management - France
• M. Kabir Hassan University of New Orleans - USA
• Juergen Huber University of Innsbruck - Austria
• Robert Hudson University of Hull - UK
• David L. Ikenberry University of Colorado at Boulder - USA
• Vasileios Kallinterakis University of Liverpool - UK
• Mercy Kano Strathmore University - Kenya
• Brian Kluger University of Cincinnati - USA
• Gregory Koutmos Fairfield University - USA
• Brian Lucey Trinity College Dublin - Ireland
• Shafaq Malik Aston University - UK
• Viktor Manahov University of York - UK
• Nguyen Thi My Linh RMIT University - Vietnam
• John R. Nofsinger University of Alaska Anchorage - USA
• Ozlem Onder Ege Universitesi - Turkey
• Belma Ozturkkal Kadir Has University - Turkey
• Julio Pindado Universidad de Salamanca - Spain
• Sunil S. Poshakwale Cranfield School of Management, Cranfield University - UK
• Raghavendra Rau University of Cambridge - UK
• Dehua Shen Tianjin University, College of Management and Economics (COME) - People's Republic of China
• Eric Shi Dongbei University of Finance and Economics - People's Republic of China
• Tyler Shumway University of Michigan - USA
• Sheeja Sivaprasad University of Westminster - UK
• Daphne Sobolev UCL School of Management - UK
• Silvana Stefani Catholic University - Italy
• Livio Stracca European Central Bank - Germany
• Sudi Sudarsanam Cranfield School of Management - UK
• Richard Taffler The University of Warwick - UK
• Erik Theissen Universität Mannheim - Germany
• Kristina Vasileva Westminster Business School, University of Westminster - UK
• Martin Weber University of Mannheim - Germany
• Russell Wermers University of Maryland - USA
• Alain Wouassom Coventry University - UK
• Rukaiyat Yusuf University of Huddersfield - UK

Citation metrics

CiteScore 2023

Further information

CiteScore is a simple way of measuring the citation impact of sources, such as journals.

Calculating the CiteScore is based on the number of citations to documents (articles, reviews, conference papers, book chapters, and data papers) by a journal over four years, divided by the number of the same document types indexed in Scopus and published in those same four years.

For more information and methodology visit the Scopus definition

CiteScore Tracker 2024

(updated monthly)

CiteScore Tracker is calculated in the same way as CiteScore, but for the current year rather than previous, complete years.

The CiteScore Tracker calculation is updated every month, as a current indication of a title's performance.

2023 Impact Factor

The Journal Impact Factor is published each year by Clarivate Analytics. It is a measure of the number of times an average paper in a particular journal is cited during the preceding two years.

For more information and methodology see Clarivate Analytics

5-year Impact Factor (2023)

A base of five years may be more appropriate for journals in certain fields because the body of citations may not be large enough to make reasonable comparisons, or it may take longer than two years to publish and distribute leading to a longer period before others cite the work.

Actual value is intentionally only displayed for the most recent year. Earlier values are available in the Journal Citation Reports from Clarivate Analytics .

Publication timeline

Time to first decision

Time to first decision , expressed in days, the "first decision" occurs when the journal’s editorial team reviews the peer reviewers’ comments and recommendations. Based on this feedback, they decide whether to accept, reject, or request revisions for the manuscript.

Data is taken from submissions between 1st June 2023 and 31st May 2024

Acceptance to publication

Acceptance to publication , expressed in days, is the average time between when the journal’s editorial team decide whether to accept, reject, or request revisions for the manuscript and the date of publication in the journal. 

Data is taken from the previous 12 months (Last updated July 2024)

Acceptance rate

The acceptance rate is a measurement of how many manuscripts a journal accepts for publication compared to the total number of manuscripts submitted expressed as a percentage %

Data is taken from submissions between 1st June 2023 and 31st May 2024 .

This figure is the total amount of downloads for all articles published early cite in the last 12 months

(Last updated: July 2024)

This journal is abstracted and indexed by

• ABI/INFORM Complete/ ABI/INFORM Global/ ABI/INFORM Research (ProQuest)
• Academic Search Alumni Edition/ Academic Search Complete/ Academic Search Elite/ Academic Search Premier/ Business Source Alumni Edition/ Business Source Complete/ Business Source Corporate Plus/ Business Source Elite/ Business Source Premier (EBSCO)
• British Library
• Cabell’s Directory of Publishing Opportunities in Economics and Finance and Management
• Professional ABI/INFORM Complete
• Professional ProQuest Central
• ProQuest Central
• ProQuest Social Science Journals
• ReadCube Discover
• RePEc: Research Papers in Economics
• Web of Science Emerging Sources Citation Index (ESCI)
• The Chartered Association of Business Schools' (CABS) Academic Journal Guide 2018
• Australian Business Deans Council (ABDC)
• Australian Research Council ERA Journal List
• Polish Scholarly Bibliography (PBN)
• The Publication Forum (Finland).

Reviewer information

Peer review process.

This journal engages in a double-anonymous peer review process, which strives to match the expertise of a reviewer with the submitted manuscript. Reviews are completed with evidence of thoughtful engagement with the manuscript, provide constructive feedback, and add value to the overall knowledge and information presented in the manuscript.

The mission of the peer review process is to achieve excellence and rigour in scholarly publications and research.

Our vision is to give voice to professionals in the subject area who contribute unique and diverse scholarly perspectives to the field.

The journal values diverse perspectives from the field and reviewers who provide critical, constructive, and respectful feedback to authors. Reviewers come from a variety of organizations, careers, and backgrounds from around the world.

All invitations to review, abstracts, manuscripts, and reviews should be kept confidential. Reviewers must not share their review or information about the review process with anyone without the agreement of the editors and authors involved, even after publication. This also applies to other reviewers’ “comments to author” which are shared with you on decision.

Resources to guide you through the review process

Discover practical tips and guidance on all aspects of peer review in our reviewers' section. See how being a reviewer could benefit your career, and discover what's involved in shaping a review.

More reviewer information

Thank you to the 2023 Reviewers

The publishing and editorial teams would like to thank the following, for their invaluable service as 2023 reviewers for this journal. We are very grateful for the contributions made. With their help, the journal has been able to publish such high...

Thank you to the 2022 Reviewers

The publishing and editorial teams would like to thank the following, for their invaluable service as 2022 reviewers for this journal. We are very grateful for the contributions made. With their help, the journal has been able to publish such high...

Thank you to the 2021 Reviewers

The publishing and editorial teams would like to thank the following, for their invaluable service as 2021 reviewers for this journal. We are very grateful for the contributions made. With their help, the journal has been able to publish such high...

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The Special Issue ‘Thaler’s Nobel prize: the evolution of behavioral finance’ is now available online. Professor Richard Thaler’s Nobel Prize recognised his work in the field of behavioral f...

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Review of Behavioural Finance  - Literati Award Winners 2023

We are pleased to announce our 2023 Literati Award winners. Outstanding Paper The impact of heuristic and herding bias...

Review of Behavioural Finance  - Literati Award Winners 2022 

We are pleased to announce our 2022 Literati Award winners. Outstanding Paper A test of the association betw...

Review of Behavioural Finance - Literati Award Winners 2021

We are pleased to announce our 2021 Literati Award winners. Outstanding Papers My way to the second generati...

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We are pleased to announce our 2020 Literati Award winners. Outstanding Papers Do overconfident CEOs stay out of trouble? Evidence f...

Review of Behavioral Finance covers not only theoretical and empirical approaches to financial decision making, but also the way the behavioral attributes of the decision makers influence the financial structure of a company, investors’ portfolio, and the functioning of financial markets.

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Review of Behavioral Finance (RBF) welcomes high-quality empirical, experimental and theoretical research articles from the finance field as well as finance applications from psychology, sociology and decision sciences disciplines and is open to a wide spectrum of methodologies including those from finance, market accounting, economics, psychology, sociology and maths.

The journal’s coverage includes but is not limited to:

• Investment behaviour of individual and institutional investors
• Financial decision processes of listed or unlisted firms
• Risk measurement and asset pricing
• Trading strategies in financial (spot/derivative) markets
• The behaviour of financial markets
• Behavioral corporate finance
• Behavioral issues relating to market accounting
• Mutual and hedge funds
• Influence of financial regulation on behavior
• Behavioral approaches to household financial decision-making

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• A-Z Publications

Annual Review of Financial Economics

Volume 7, 2015, review article, behavioral finance.

• David Hirshleifer 1
• View Affiliations Hide Affiliations Affiliations: Merage School of Business, University of California, Irvine, California 92697; email: [email protected]
• Vol. 7:133-159 (Volume publication date December 2015) https://doi.org/10.1146/annurev-financial-092214-043752
• © Annual Reviews

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.

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For decades, psychologists and sociologists have pushed back against the theories of mainstream finance and economics, arguing that human beings are not rational utility-maximizing actors and that markets are not efficient in the real world. The field of behavioral economics gained momentum in the late 1970s to address these issues, accumulating a wide swath of cases when people systematically behave "irrationally." The application of behavioral economics to the world of finance is known, unsurprisingly, as behavioral finance .

From this perspective, it's not difficult to imagine the stock market as a person: It has mood swings (and price swings) that can turn on a dime from irritable to euphoric; it can overreact hastily one day and make amends the next. But can human behavior really help us understand financial matters? Does analyzing the mood of the market provide us with any hands-on strategies? Behavioral finance theorists suggest that it can.

Key Takeaways

• Behavioral finance asserts that rather than being rational and calculating, people often make financial decisions based on emotions and cognitive biases.
• For instance, investors often hold losing positions rather than feel the pain associated with taking a loss.
• The instinct to move with the herd explains why investors buy in bull markets and sell in bear markets.
• Behavioral finance is useful in analyzing market returns in hindsight, but has not yet produced any insights that can help investors develop a strategy that will outperform in the future.

Some Findings from Behavioral Finance

Behavioral finance is a subfield of behavioral economics , which argues that when making financial decisions like investing people are not nearly as rational as traditional finance theory predicts. For investors who are curious about how emotions and biases drive share prices, behavioral finance offers some interesting descriptions and explanations.

The idea that psychology drives stock market movements flies in the face of established theories that advocate the notion that financial markets are efficient. Proponents of the  efficient market hypothesis (EMH), for instance, claim that any new information relevant to a company's value is quickly priced by the market. As a result, future price moves are random because all available (public and some non-public ) information is already discounted in current values.

However, for anyone who has been through the Internet bubble and the subsequent crash, the efficient market theory is pretty hard to swallow. Behaviorists explain that, rather than being anomalies , irrational behavior is commonplace. In fact, researchers have regularly reproduced examples of irrational behavior outside of finance using very simple experiments.

"It's understated to say that financial health affects mental and physical health and vice versa. It's just a circular thing that happens," said Dr. Carolyn McClanahan , founder & director of Financial Planning at Life Planning Partners Inc. "When people are under stress because of finances, they release chemicals called catecholamines. I think people have heard of things like epinephrine and stuff like that, that kind of put your whole body on fire. So that affects your mental health, affects your ability to think. It affects your physical health, wears you out, makes you tired, you can't sleep. And then once you can't sleep, you start to have bad behaviors to deal with that."

The Importance of Losses Versus Significance of Gains

Here is one experiment: Offer someone a choice of a sure $50 or, on the flip of a coin, the possibility of winning $100 or winning nothing. Chances are the person will pocket the sure thing. Conversely, offer a choice of 1) a sure loss of $50 or 2) on a flip of a coin, either a loss of $100 or nothing. The person, rather than accept a $50 loss, will probably pick the second option and flip the coin. This is known as loss aversion .

The chance of the coin landing on one side or the other is equivalent in any scenario, yet people will go for the coin toss to save themselves from a $50 loss even though the coin flip could mean an even greater loss of $100. That's because people tend to view the possibility of recouping a loss as more important than the possibility of greater gain.

The priority of avoiding losses also holds true for investors. Just think of Nortel Networks shareholders who watched their stock's value plummet from over $100 a share in early 2000 to less than $2 a few years later. No matter how low the price drops, investors—believing that the price will eventually come back—often hold stocks rather than suffer the pain of taking a loss .

The  herd instinct explains why people tend to imitate others. When a market is moving up or down, investors are subject to a fear that others know more or have more information. As a consequence, investors feel a strong impulse to do what others are doing.

Behavior finance has also found that investors tend to place too much worth on judgments derived from small samples of data or from single sources. For instance, investors are known to attribute skill rather than luck to an analyst that picks a winning stock.

On the other hand, beliefs are not easily shaken. One notion that gripped investors through the late 1990s, for example, was that any sudden drop in the market is a buying opportunity. Indeed, this buy-the-dip view still pervades. Investors are often overconfident in their judgments and tend to pounce on a single "telling" detail rather than the more obvious average. In doing so, they fail to see the larger picture by focusing too much on smaller details.

We can ask ourselves if these studies will help investors beat the market. After all, rational shortcomings should provide plenty of profitable opportunities for wise investors. In practice, however, few if any value investors are deploying behavioral principles to sort out which cheap stocks actually offer returns that are consistently above the norm.

The impact of behavioral finance research still remains greater in academia than in practical money management . While theories point to numerous rational shortcomings, the field offers little in the way of solutions that make money from market manias.

Robert Shiller, the author of "Irrational Exuberance" (2000), showed that in the late 1990s, the market was in the thick of a bubble. But he couldn't say when the bubble would pop. Similarly, today's behaviorists can't tell us when the market has hit a top, just as they could not tell when it would bottom after the 2007-2008 financial crisis. They can, however, describe what an important turning point might look like.

What does behavioral finance tell us?

Behavioral finance helps us understand how financial decisions around things like investments, payments, risk, and personal debt, are greatly influenced by human emotion, biases, and cognitive limitations of the mind in processing and responding to information.

How does behavioral finance differ from mainstream financial theory?

Mainstream theory, on the other hand, makes the assumptions in its models that people are rational actors, that they are free from emotion or the effects of culture and social relations, and that people are self-interested utility maximizers. It also assumes, by extension, that markets are efficient and firms are rational profit-maximizing organizations. Behavioral finance counters each of these assumptions.

How does knowing about behavioral finance help?

By understanding how and when people deviate from rational expectations, behavioral finance provides a blueprint to help us make better, more rational decisions when it comes to financial matters.

The behavioralists have yet to come up with a coherent model that actually predicts the future rather than merely explain, with the benefit of hindsight, what the market did in the past. The big lesson is that theory doesn't tell people how to beat the market. Instead, it tells us that psychology causes market prices and fundamental values to diverge for a long time.

Behavioral finance offers no investment miracles to capitalize on this divergence, but perhaps it can help investors train themselves on how to be watchful of their behavior and, in turn, avoid mistakes that will decrease their personal wealth.

Raymond A. Mason School of Business. " What Is Behavioral Finance? "

Federal Reserve Bank of San Francisco. " Bubbles Tomorrow, Yesterday, but Never Today? "

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