Behavioral finance I. An introduction to behavioral finance

Behavioral economics, in simple terms, represents a combination of psychology and economics. In a narrower sense, expert literature also considers sociology and anthropology as important parts of this interdisciplinary field. Insights from other disciplines, such as history or political science, which exert both direct and indirect influences, are also significant.

The primary role of behavioral economists is to uncover the factors that lead to flawed or inefficient human decisions and the associated economic drawbacks. They also seek to explain why some economic actors, whether individuals or firms represented by managers, exhibit signs of cognitive limitations and the complications inherent in human decision-making and beliefs.

Behavioral approaches used to address various financial problems are referred to as behavioral finance. The main tasks of behavioral finance are to research and define why managers and investors make systematic errors and poor decisions that contradict rational expectations, utility theory, and risk principles. The field also studies financial market behavior, which is largely driven by the actions of companies and individual investors.

Richard Thaler describes behavioral finance as "open-minded finance." Hersh Shefrin asserts that behavioral finance is a rapidly growing field influenced by psychology, which examines the behavior of financial market participants. His similarly popular definition describes behavioral finance as the study of how psychology impacts financial decision-making and financial markets.

Sources:
Text: SHEFRIN (2000), THALER (1993), BELSKY a GILOVICH (1999)
Image: SCHINDLER, M. 2007. Rumors in financial markets: Insights into behavioral finance.