Behavioral Finance

  • David Ruppert
Part of the Springer Texts in Statistics book series (STS)


Behavioral finance is the application of cognitive psychology to the study of the participants in financial markets. The question being investigated in this field is how humans actually perceive risk and make investment decisions. Economists have long assumed that people act so as to maximize the utility of their wealth, but we are learning that human behavior is more complex than this. People use rules-of-thumb, called heuristics, as short-cuts to reasoning. Moreover, how a person makes a financial decision depends on how the decision problem is stated, a phenomenon called frame-dependence. For example, people have a strong aversion to losses and a decision might depend on whether a decision problem is posed in a way that mentions the word “loss.” Shefrin (2000) mentions the example of a stock broker who realized that clients were extremely reluctant to sell stocks at a loss in order to buy other stocks, even if this were the best investment decision for them. However, this broker found that clients were willing to sell at a loss when told that they were “transferring assets” rather than selling losers. Whether selling losers is a good thing for an investor could be debated, but the point is that the decision made by clients depends on how the problem is framed by the broker.


Stock Price Abnormal Return Earning Announcement Earning Surprise Investor Sentiment 
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Copyright information

© Springer Science+Business Media New York 2004

Authors and Affiliations

  • David Ruppert
    • 1
  1. 1.School of Operations Research and Industrial EngineeringCornell UniversityIthacaUSA

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