Behavioural Finance and Aggregate Market Behaviour: Where do we Stand?
This paper selectively reviews the literature on behavioural finance, focusing on the aggregate market implications of the behavioural biases that this literature has identified. Advocates of behavioural economics and finance argue that economic agents behave in a way which departs significantly and systematically from the axioms of expected utility theory. The paper surveys the main “anomalies” identified by this literature in the light of their possible implications on aggregate market behaviour. In particular, the anomalies are categorised into (i) those derived from cognitive limitations (bounded rationality), (ii) those determined by the interference of agents’ emotional state, (iii) those determined by choice bracketing, and (iv) those which suggest that a pre-determined set of preferences does not exist altogether. Moreover, prospect theory is surveyed in particular detail, as it has become a serious challenger to expected utility in economics and finance due to the empirical support, its mathematical tractability and its being consistent with rational expectations. Finally, the paper claims that while convincing evidence against market rationality in the beatthe- market sense is yet to be provided, many indications are now available that financial markets may indeed be “irrational” in other reasonable and relevant meanings.
|Date of creation:||May 2002|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +44 (0)116 252 2887
Fax: +44 (0)116 252 2908
Web page: http://www2.le.ac.uk/departments/economics
More information through EDIRC
|Order Information:|| Web: http://www2.le.ac.uk/departments/economics/research/discussion-papers Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fischer, Carolyn, 1999.
"Read This Paper Later: Procrastination with Time-Consistent Preferences,"
dp-99-19, Resources For the Future.
- Fischer, Carolyn, 2001. "Read this paper later: procrastination with time-consistent preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 46(3), pages 249-269, November.
- Loomes, Graham & Segal, Uzi, 1994.
"Observing Different Orders of Risk Aversion,"
Journal of Risk and Uncertainty,
Springer, vol. 9(3), pages 239-56, December.
- al-Nowaihi, Ali & Stracca, Livio, 2002. "Non-standard central bank loss functions, skewed risks, and certainty equivalence," Working Paper Series 0129, European Central Bank.
- Lisa A. Kramer & Mark J. Kamstra & Maurice D. Levi, 2000.
"Losing Sleep at the Market: The Daylight Saving Anomaly,"
American Economic Review,
American Economic Association, vol. 90(4), pages 1005-1011, September.
- Kamstra, M.J. & Kramer, L.A. & Levi, M.D., 1998. "Losing Sleep at the Market: The Daylight-Savings Anomaly," Discussion Papers dp98-04, Department of Economics, Simon Fraser University.
- Bowman, David & Minehart, Deborah & Rabin, Matthew, 1999.
"Loss aversion in a consumption-savings model,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 38(2), pages 155-178, February.
- Mark Mitchell & Todd Pulvino & Erik Stafford, 2002. "Limited Arbitrage in Equity Markets," Journal of Finance, American Finance Association, vol. 57(2), pages 551-584, 04.
- Lattimore, Pamela K. & Baker, Joanna R. & Witte, Ann D., 1992. "The influence of probability on risky choice: A parametric examination," Journal of Economic Behavior & Organization, Elsevier, vol. 17(3), pages 377-400, May.
- Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
When requesting a correction, please mention this item's handle: RePEc:lec:leecon:02/10. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mrs. Alexandra Mazzuoccolo)
If references are entirely missing, you can add them using this form.