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Behavioural Finance: Beginnings and Applications

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  • Kuriakose, Francis

Abstract

The essay traces the beginning of behavioural finance by examining the development of expected utility model. Expected utility model is based on the assumptions of time consistent preferences of utility. However, experimental results in psychology regarding choice under risk and uncertainty shows well-defined deviations from the predictions of expected utility model. It was found that there were systematic biases and heuristics that economic decision makers use to make choices. In the next section, the essay describes some of these heuristics and how they modify the assumptions of utility model. Applications of behavioural understanding in finance is briefly discussed to show the widespread prevalence of behavioural heuristics in and beyond finance. The essay concludes by arguing that accommodating the behavioural variable is necessary to make neoclassical model more relevant to the real world.

Suggested Citation

  • Kuriakose, Francis, 2017. "Behavioural Finance: Beginnings and Applications," MPRA Paper 84841, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:84841
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    References listed on IDEAS

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    More about this item

    Keywords

    Behavioural finance; Psychology; Economics; Rationality;
    All these keywords.

    JEL classification:

    • B2 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925
    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • G2 - Financial Economics - - Financial Institutions and Services
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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