Chapter 1. Introduction

Author: Shefrin, Hersh

Source: Beyond Greed and Fear, October 2002 , pp. 3-13(11)

Publisher: Oxford Scholarship Online Monographs

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Abstract:

Behavioral finance consists of three themes: (1) heuristic-driven bias; (2) frame dependence; and (3) inefficient markets. These themes are ubiquitous and germane, touching every corner of the financial landscape: portfolio selection, corporate finance, asset pricing, and options. Notably all the preceding areas have been recognized through the awarding of Nobel prizes in Economics. Indeed, behavioral finance was explicitly recognized with the 2002 award to Daniel Kahneman, one of the psychologists upon whose work behavioral finance is built. A key lesson for financial practitioners is to appreciate that successful investing requires taking the psychological propensities of others into account. Historically, behavioral psychologists first laid the groundwork for behavioral finance by developing the underlying psychological framework. In the 1980s a few financial economists began to apply this framework to finance. Debates with proponents of the traditional approach soon followed.

Keywords: behavioral finance; heuristic-driven bias; pick-a-number game; inefficient markets; frame dependence; Nobel Prize

Document Type: Research article

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