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Behavioral finance: An insight into the psychological and sociological biases affecting financial decision of investors Bhattacharya Rajib Assistant Professor, Budge Budge Institute of Technology, Kolkata, West Bengal, India. Abstract Conventional theories of finance are built on the assumption that people behave rationally and predictably while taking investment and divestment decisions so as to maximize their wealth. In practice, it is observed that people often exhibit quasi-rational or in some cases irrational financial behavior while taking investment and divestment decisions. Such behavior, triggered by emotional and cognitive biases of people, are inconsistent with and contradictory to the conventional theories of finance. Such illogical and quasi-rational/irrational financial behavior of investors has been termed as Behavioral Finance. Behavioral Finance is a potential factor behind market inefficiencies. This paper aims at discussing three relevant aspects of behavioral finance. Firstly the paper discusses the factors causing such irrational behavior and also to build a conceptual model identifying the causal factors for investment behavior of people and the mode in which investment behavior is affected by such factors. The second objective of this paper is to suggest measures to counter such factors and enable the investors to take more rational decisions thereby reducing the chance of market inefficiencies. Thirdly the paper aims at identifying the possible area for further research on behavioral finance. Top Keywords Behavioral Finance, Cognitive & Emotional Bias, Market Inefficiency, Quasi-rational Behavior. Top | |
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