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The Rise and Rise of Behavioural Finance

  • Imad A. Moosa
  • Vikash Ramiah
Chapter

Abstract

Behavioural finance discards the assumptions of rationality and fair pricing, seeking to explain observed behaviour in financial markets by using the principles of psychology. Irrationality can be attributed to behavioural biases, which are either cognitive or emotional, both of which can lead to poor and irrational financial decisions. Kahneman and Tversky provided the early psychological theories that constitute the foundation of behavioural finance, and they also developed prospect theory that explains loss aversion. Irrationality is readily observable when, for example, people gamble against the odds or accept higher risk for lower return. Behavioural finance seeks to explain irrationality and the presence of market anomalies such as the calendar effects and profitable trading.

Keywords

Behavioural finance Rationality Cognitive biases Emotional biases Psychology 

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Copyright information

© The Author(s) 2017

Authors and Affiliations

  1. 1.School of Economics, Finance and MarketingRMITMelbourneAustralia
  2. 2.School of CommerceUNISAAdelaideAustralia

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