Dates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental
Behavior Behavioral analysis	See behavior
Behavioral asset pricing model (BAPM)	See behavioral financial analysis
Behavioral biases in finance / economics	See behavioral biases
Behavioral corporate finance	See corporate behavior
Behavioral economics	See behavioral economics

	Dates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed/ discussed, i: incidental
Behavioral finance (BF)	Many messages in the BF group (obviously!) + see behavioral analysis, biases, EMH pricing, utility...
Money dreams on the shrink's sofa. Definition: To put it simply, BF / Behavioral finance shows how we behave with money. It can be further defined as the application of individual and collective psychology (*) to finance. What is looked for is how financial decisions are taken, and what are their effects on financial activities. And also the incidences on economic activities (although we have here a sister branch of knowledge; behavioral economics, see that phrase). Behavioral finance focuses mostly on - individual and collective, cognitive and emotional - biases that might affect those decisions, and that lead to suboptimal outcomes for the decider, and more generally to financial market anomalies (see that word). (*) See also the "psychology" and "social psychology" articles.   BF combines two branches of studies: Field of study Issues that are explored Practical research topics Practical objectives Behavioral finance micro   (aka Psychological BF, or financial psychology) How investors, borrowers, etc. make choices and behave in situations involving money. To investigate those players' decision-making processes, and the financial consequences for them. To help investors overcome their own damaging investing biases.   Behavioral finance macro (aka Quantitative BF) What are the effects on financial markets of their collective attitudes, reactions, choices and behaviors.   To spot, in market statistics, the deviations from theoretically "efficient" prices and returns. To help investors take advantages of - and avoid pitfalls due to - biased market behaviors.   Behavioral finance as a quest for market anomalies Witch hunting? Or hygiene? BF is interested in: Mind processes linked to     decisions that involve money. It studies in what they differ from the canons of logic and self-interest that are considered rational. Those differences are attributed to what are labeled behavioral biases (see above). Their effects on financial markets, such as prices and returns anomalies / inefficiencies. In other words, behavioral finance recognizes that economic model are usually too "mechanical" (even circular for some of them) to take fully into account the human factor. More specifically, it tries to explain how and why actual market prices and returns differ from what "standard finance" predicts. Standard finance / mainstream finance means here chiefly the EMH-based models (see EMH), even if their relevancy is more and more debated. A practical objective is to help investors to detect and understand those biases / anomalies and use them in investment strategies (see behavioral analysis). Weaknesses and limitations of Behavioral finance and Behavioral economics Is focusing on biases a reductive ...bias? Although their relevancy is more and more accepted, not everybody still considers BF/BE as fully scientific and practical fields. There are still exchanges of arguments for or against Behavioral finance and Behavioral economics. The debate should not be based on the idea that BF/BE would consider economic players as always irrational, and markets as always inefficient. This is a misunderstanding about what those disciplines state. They talk about  bounded rationality and degrees of efficiency. Anyway, BF/BE have some weaknesses and limitations. The two main ones are their overemphasis on: Reactions to events (underreaction, overreaction...). Why should investors act and adjust their opinion only when there is a new event or information? Why consider that "rationality" or "normality" depends on such instant adjustments? Well, this critic - about the exaggerated importance given to reactions (*) as a the key criteria to judge rationality - addresses both the EMH and BF/BE. (*) Maybe a sequel of "behaviorism" with its "stimulus - reaction"  paradigm considered as the source of all behaviors. As if self-generated intentions and goals, not fully linked to the environment, did not also play a part in behaviors Anomalies (or divergences) compared to standard finance. BF/BE borrows standard finance concepts (EMH...) as references, as if the main criteria of "normality" and wisdom in finance (and economics) were expected monetary   returns and risks (the canons of economic "utility", see that word). This might be a reductive way to define the norm and therefore to judge what is anomalous. Maybe more questions are needed   What if those criteria were "too obvious" (therefore superficial as a kind of availability heuristic) to fit all realities? Why any divergence from those two criteria should be considered a "market anomaly"? What about uncertainty as a broader concept than statistical risk? More important, why should those criteria be the only "rational" ones in economics and finance? What about non monetary returns which might have their legitimacy also? Empathy, fairness, fun, power, status, human challenge, search for experience and knowledge, and myriads of other intentions and goals, might be, at least to some degree, as legitimate or wise as just monetary returns. Therefore "Multipurpose" finance (or multivalence finance : see fuzzy logic) could be an important field of research. Still a long path ahead towards understanding There are still many things to observe and study in those fields, and more generally in what human and social sciences see as the reasons, processes and effects of "decision making". We can doubt that there would ever be a fully predictive economic or financial science or technique, as uncertainty  will not disappear. Even so, BF is not totally enslaved to standard valuations models and their "anomalies", it also devised some models on its own (see behavioral analysis). Behavioral Finance might lack a general theory and general "laws". But maybe this should not be taken as its purpose. All the more as there is no general law of human and social behavior. Let us be philosophical: we may never end learning more and more about the human being and human societies, a quest that started thousands of years ago! Maybe that is why "Greeks" are so popular in financial theory ;-).   What about the ethics ? Behavioral economic / finance studies and findings are sometimes accused of been used as tools of manipulation. This is quite reductive. To make an analogy, hands or feet can be used in evil way, but that does not mean they are evil. But to know its finding can be on the contrary precious to protect oneself against manipulation (including self-manipulation). This is the main purpose of that glossary by the way!

Behavioral financial analysis (BA BFA)	This article has its own page
Behavioral (market) parameters	See behavioral financial analysis
Behavioral portfolio theory (BPT)	See behavioral financial analysis
Behavioral pricing	See behavioral financial analysis
Behavioral public economics / finance	See behavioral economics
Behavioral stock pricing model (BSPM), Behavioral valuation	See behavioral financial analysis

Behavioralist	See behavioral economics, behavioral finance
Definition: behavioralist is a name sometimes given to a person who studies and uses or promotes behavioral finance and economics. Its approach is not specially linked to a psychological or sociological (or economic) school of thoughts. It accepts any research tool and does not follow any specific ideology. It is focused on economic and financial effects of human and social behaviors and its analysis is open to any process that causes those behaviors. A possible confusion A behavioralist should not be confused with a "behaviorist", an adept of the narrow psychological theory called "behaviorism". A behaviorist states that all human actions take place in relation to the "stimulus => reaction" couple. This animalistic paradigm is quite reductive as it: Does not dig further into what happens in the black box between the input and the output. Tends to neglect that a stimulus can be self-generated, not just a response to some outside situation. Intentions (see that word) might override pure reactions
Entrepreneur behavior	See entrepreneur

(*) To find those messages: reach that Behavioral-Finance group and, once you are there, 1) click "messages", 2) enter your query in "search archives".

Members of the Behavioral Finance Group, please vote on the glossary quality at Behavioral-Finance/polls

This page last update: 16/11/09            Disclaimer / Avertissement légal     B section of the Glossary   Behavioral-Finance Gallery main page

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