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Towards Behavioral Finance Theory

Author

Listed:
  • Teodor Sedlarski

    (Faculty of Economics and Business Administration, Sofia University St Kliment Ohridski)

  • Gabriela Georgieva

    (Faculty of Economics and Business Administration, Sofia University St Kliment Ohridski)

Abstract

This article summarizes fundamental concepts in the emerging field of behavioral finance theory. Traditional financial models are being extended with behavioral ones, which assume that markets are inefficient, market players are boundedly rational and investment bubbles exist, potentialy leading to large scale financial crises. Behavioral finance enhances main theoretical elements of the contemporary financial paradigm – the portfolio theory, the capital asset pricing model and the efficient market hypothesis, substituting them with behavioral portfolio theory, behavioral asset pricing model and the adaptive market hypothesis. These are briefly analyzed in the article, as well as various known heuristics and financial market anomalies.

Suggested Citation

  • Teodor Sedlarski & Gabriela Georgieva, 2018. "Towards Behavioral Finance Theory," Yearbook of the Faculty of Economics and Business Administration, Sofia University, Faculty of Economics and Business Administration, Sofia University St Kliment Ohridski - Bulgaria, vol. 15(1), pages 207-241, June.
    • Handle: RePEc:sko:yrbook:v:15:y:2018:i:1:p:207-241
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    More about this item

    Keywords

    prospect theory; behavioral finance; heuristics; behavioral asset pricing model.;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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