Behavioral Finance: An Insight into Investor’s Psyche

Content Provider	Semantic Scholar
Author	Arora, Kapil
Copyright Year	2015
Abstract	The field of finance, so far, has dealt with certain central paradigms derived from investor rationality, viz., portfolio allocation based on expected return and risk, risk-based asset pricing models, i.e., CAPM and other similar frameworks, the pricing of contingent claims, and the Miller-Modigliani theorem and its augmentation by the theory of agency. While these approaches revolutionized the study of finance and brought rigor into the field, many lacunae were left outstanding by the theories. For example, the traditional models had a limited role towards understanding trading volumes while focusing mostly on price data. The price data was used to compute returns, abnormal, as well as to understand the pricing phenomenon from the eyes of an efficient market researcher or to check the over or under-pricing of stocks. Though the benefits of diversification were emphasized by modern theories, individual investors often held only a few stocks in their portfolios. Finally, expected returns did not seem to vary in the cross-section only because of risk differentials across stocks. Based on the above observations, traditional finance appeared to play a limited role in understanding issues such as (i) why do individual investors trade, (ii) how do they perform, (iii) how do they choose their portfolios, and (iv) why do returns vary across stocks for reasons other than risk. Finance education in general can be more useful if it sheds specific light on active investing by addressing aspects such as (i) what mistakes to avoid while investing, and (ii) what strategies in financial markets are likely to work in terms of earning supernormal returns. Those are the main pedagogical goals of behavioral finance, which allows for explanations of financial phenomena based on non-rational behavior amongst investors. Behavioral finance — that is, finance from a broader social science perspective including psychology and sociology — is now one of the most researched areas in finance. This paper focuses on understanding the various aspects related to Behavioral finance.
File Format	PDF HTM / HTML
Alternate Webpage(s)	http://www.iosrjournals.org/iosr-jef/papers/SIFICO/Version-1/7.%2041-45.pdf
Language	English
Access Restriction	Open
Content Type	Text
Resource Type	Article