Behavioral finance III. Research areas of behavioral finance
Richard Thaler and Nicholas Barberis explain behavioral finance as follows: Behavioral finance argues that some financial phenomena can be understood using models in which most market participants are not fully rational. This field consists of two main components:
Limits to arbitrage, which demonstrate that it can be challenging for rational traders to correct deviations caused by less rational traders;
Psychology, which catalogs the types of deviations from perfect rationality that we would typically expect.
After discussing these two areas, several applications of behavioral finance emerge, including financial markets, average returns, individual investor and trader behavior, and corporate finance.
In simplified terms, the two main areas of interest in behavioral finance are:
The behavior of market participants, including stock traders, financial managers, and investors (and, in some cases, even the firms themselves as subjects). This area encompasses decision-making and related errors, deviations from rational behavior, subjective values and traits, attitudes and opinions, the perception of financial relationships, and more.
The behavior of financial markets, both partial and aggregated. Here, the focus is on market efficiency, short-term and long-term development, uncovering hidden opportunities, explaining anomalies, investment returns, income levels, and other factors.
An overview of selected topics and areas of behavioral finance research is presented in the table below, which can be downloaded in PDF or XLSX format. The image provides a sample of a few topics for illustration (currently available in Slovak language only).
Sources:
THALER a BARBERIS (2001);
CÁR, T.: Psychológia investovania. Behaviorálne financie. Technická analýza (2006);
VLACHYNSKÝ, K.: Finančné rozhodovanie a behaviorálne financie (2009)
Table: based on https://behaviouralfinance.net/ and https://www.absolute astronomy.com/topics/Behavioral_finance