A Survey of Behavioral Finance Summary - 1332 Words

A Survey of Behavioral Finance Nicholas Barberis and Richard Thaler In this handbook, Barberis and Thaler define the differences between traditional finance and behavioral finance. Traditional finance is rational.Rationality means two things; correct Bayesian Updating and choises consistent with expected utility. On the other hand behavioral finance assumes that market is not fully rational and analyzes the facts when the some of the princibles are loosen up. This essay also discusses about two main topics; limits to arbitrage and psychology. These two topics are known as the two buildings blocks of the behaviour finance. In the normal markets security prices equal to fundamental value.In this†¦show more content†¦Ambigutiy aversion is defines risk as a gamble with known distribution and uncertainty as a gamble with unknown distribution, and suggests that people dislike uncertainty more than risk. The experiments about ambigutiy aversions shows that people do not like sitiuations where they are uncertain . Aversion changes based on preceived competence at assessing relevant distribution. US stock market is a good research area for the facts about its behaviour. The most three important behaviours are equity premium , high volality and predictable returns. Risk preium seems to high and possible explanations are under prospect theory. Rational approches must focus on changing risk aversion to explain volatility. Volatiliy explanations under beliefs are overreaction to dividend growth, overreaction to returns, confusion between real and nominal rates. All three of these facts are known as eqity puzzles. Both the rational and behavioral approaches to finance have made progress in understanding the three puzzles singled out at the start of this section. The advances on the rational side are well described in other articles in this handbook. Here, we discuss the behavioral approaches, starting with the equity premium puzzle and then turning to the volatility puzzle. Equity premium puzzle is that even though stocksShow MoreRelatedA Survey of Behavioral Finance Summary1322 Words   |  6 PagesA Survey of Behavioral Finance Nicholas Barberis and Richard Thaler In this handbook, Barberis and Thaler define the differences between traditional finance and behavioral finance. Traditional finance is rational.Rationality means two things; correct Bayesian Updating and choises consistent with expected utility. On the other hand behavioral finance assumes that market is not fully rational and analyzes the facts when the some of the princibles are loosen up. This essayRead MorePlan to Increase Team Motivation, Satisfaction and Performance1062 Words   |  5 Pagesa person thinks and behaves is a reference that defines his or her attitude. 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