AbstractBehavioral finance as a subdiscipline of behavioral economics is finance incorporating findings from psychology and sociology into its theories. Behavioral finance models are usually developed to explain investor behavior or market anomalies when rational models provide no sufficient explanations. To understand the research agenda, methodology, and contributions, this survey reviews traditional finance theory first. Then, this survey shows how modifications (e.g. incorporating market frictions) can rationally explain observed individual or market behavior. In the second section, the survey will explain the behavioral finance research methodology -how biases are modeled, incorporated into traditional finance theories, and tested empirically and experimentally- using one specific subset of the behavioral finance literature, the overconfidence literature.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 03-14.
Length: 29 pages
Date of creation: 12 Sep 2003
Date of revision:
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-10-12 (All new papers)
- NEP-CBE-2003-10-12 (Cognitive & Behavioural Economics)
- NEP-EXP-2003-10-12 (Experimental Economics)
- NEP-FIN-2003-10-12 (Finance)
- NEP-HPE-2003-10-12 (History & Philosophy of Economics)
- NEP-PKE-2003-10-12 (Post Keynesian Economics)
- NEP-RMG-2003-10-12 (Risk Management)
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