Behavioral finance II.Barriers to behavioral finance
Behavioral finance has a significant impact on the practical aspects of corporate finance. The traditional approach to corporate finance, developed by value-oriented management, is based on three concepts:
Rational behavior
The Capital Asset Pricing Model (CAPM)
Market efficiency
Proponents of behavioral finance argue that psychological influences disrupt all three components of this traditional paradigm. According to them, psychological phenomena prevent individuals from making rational decisions, risk premiums of securities from being fully determined by beta coefficients, and market prices from consistently aligning with fundamental values.
From a behavioral finance perspective, there are two key obstacles to the process of maximizing a firm's market value. These obstacles can be either internal or external from the company's standpoint.
The first obstacle is referred to as behavioral costs. These are costs or, in other words, value losses associated with mistakes made by managers due to cognitive biases and emotional influences.
The second obstacle is the behavioral errors of analysts and investors. We could describe the first obstacle as the flawed behavior of individuals within the company and the second as the flawed behavior of markets or the external actors influencing the market.
List of theories below is currently available in Slovak language only.
Sources:
Text: SHEFRIN, H. 2001. Behavioral corporate finance.
Images: based on https://behaviouralfinance.net/ ;
SHEFRIN, H. 2001. Behavioral corporate finance;
CÁR, T. 2006. Psychológia investovania. Behaviorálne financie. Technická
analýza; https://behaviouralfinance.net/