A Survey of Behavioral Macro-Finance

A summary of the literature in Behavioral Macro-Finance is presented hereby. In the literature about behavioral finance, we encounter the distinction between behavioral macro-finance and behavioral microfinance. Behavioral macro-finance is defined as the field that “detects and describes anomalies in the efficient market hypothesis that behavioral models may explain” (Pompian, 2006). Behavioral micro-finance refers to the field that “examines behaviors or biases of individual investors that distinguish them from the rational actors envisioned in classical economic theory” (Pompian, 2006). This chapter describes the rise of behavioral macro-finance and categorizes the literature into six subtopics: (1) Bubbles, the “Irrational Exuberance,” (2) the Equity Premium Puzzle, (3) the Volatility Puzzle, (4) Violation of the Law of One Price, Limits to Arbitrage, and (5) “Micro-efficient” but “Macro-inefficient.”