Behavioral Finance 2.0

Over the last decade or so, the findings of cognitive and behavioral psychologists have found their way into finance. The implications of well-documented behavioral tendencies have yet to fully be realized in profession. Behavioral economists have generally focused on how cognitive biases can distor...

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Bibliographic Details
Published in:Journal of portfolio management 2012-06, Vol.38 (4), p.1
Main Author: Jones, Bob
Format: Article
Language:English
Subjects:
Advisors
Behavioral economics
Bias
Capital markets
Decision making
Economic growth
Efficiency
Information processing
Investments
Investors
Securities markets
Volatility
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Summary:Over the last decade or so, the findings of cognitive and behavioral psychologists have found their way into finance. The implications of well-documented behavioral tendencies have yet to fully be realized in profession. Behavioral economists have generally focused on how cognitive biases can distort market efficiency. They find that documented decision-making biases can explain many widely noted market anomalies, including excess volatility excess trading, the value effect, the momentum effect, and bubbles and crashes. Markets are certainly competitive, as in hard to beat, but that doesn't necessarily mean they process information rationally or efficiently. Practitioners have also just begun to consider the full implications of behavioral finance -- both on their own businesses and those of the organizations in which they invest. Markets should become even more informationally efficient, leading to better capital allocations and greater economic growth.
ISSN:0095-4918
2168-8656
DOI:10.3905/jpm.2012.38.4.001