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Finance and the Behavioral Prospect

Risk, Exuberance, and Abnormal Markets

  • James Ming Chen

Table of contents

About this book

Introduction

This book explains how investor behavior, from mental accounting to the combustible interplay of hope and fear, affects financial economics. The transformation of portfolio theory begins with the identification of anomalies. Gaps in perception and behavioral departures from rationality spur momentum, irrational exuberance, and speculative bubbles. Behavioral accounting undermines the rational premises of mathematical finance. Assets and portfolios are imbued with “affect.” Positive and negative emotions warp investment decisions. Whether hedging against intertemporal changes in their ability to bear risk or climbing a psychological hierarchy of needs, investors arrange their portfolios and financial affairs according to emotions and perceptions. Risk aversion and life-cycle theories of consumption provide possible solutions to the equity premium puzzle, an iconic financial mystery. Prospect theory has questioned the cogency of the efficient capital markets hypothesis. Behavioral portfolio theory arises from a psychological account of security, potential, and aspiration.

Keywords

postmodern portfolio theory mathematical finance risk seeking risk aversion VAR value-at-risk equity premium

Authors and affiliations

  • James Ming Chen
    • 1
  1. 1.College of LawMichigan State UniversityEast LansingUSA

Bibliographic information

  • DOI https://doi.org/10.1007/978-3-319-32711-2
  • Copyright Information The Editor(s) (if applicable) and The Author(s) 2016
  • Publisher Name Palgrave Macmillan, Cham
  • eBook Packages Economics and Finance
  • Print ISBN 978-3-319-32710-5
  • Online ISBN 978-3-319-32711-2
  • Buy this book on publisher's site
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Finance, Business & Banking