Behavioral economics and the related field, behavioral finance, study the effects of social, cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and the resource allocation. The fields are primarily concerned with the bounds of rationality of economic agents. Behavioral models typically integrate insights from psychology with neo-classical economic theory. In so doing they cover a range of concepts, methods, and fields.
Behavioral analysts are not only concerned with the effects of market decisions but also with public choice, which describes another source of economic decisions with related biases towards promoting self-interest.
There are three prevalent themes in behavioral finances:
- Heuristics: People often make decisions based on approximate rules of thumb and not strict logic.
- Framing: The collection of anecdotes and stereotypes that make up the mental emotional filters individuals rely on to understand and respond to events.
- Market inefficiencies: These include mis-pricings and non-rational decision making.
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Read more about Behavioral Finance: History, Criticisms
Famous quotes containing the word finance:
“There is an enormous chasm between the relatively rich and powerful people who make decisions in government, business, and finance and our poorer neighbors who must depend on these decisions to alleviate the problems caused by their lack of power and influence.”
—Jimmy Carter (James Earl Carter, Jr.)