Behavioural finance began as an attempt to understand why financial markets react inefficiently to public information. One stream of behavioural finance examines how psychological forces induce traders and managers to make suboptimal decisions, and how these decisions affect market behaviour. Another stream examines how economic forces might keep rational traders from exploiting apparent opportunities for profit. Behavioural finance remains controversial, but will become more widely accepted if it can predict deviations from traditional financial models without relying on too many ad hoc assumptions, and expand to settings (particularly corporate finance) in which arbitrage forces are weaker.
KeywordsAccruals anomaly Anomalies Arbitrage Behavioural finance Book-to-market effect Capital asset pricing model Efficient markets hypothesis Equity premium puzzle Gambler’s fallacy Home bias puzzle Hot-hand fallacy Incomplete revelation hypothesis Limited attention Market microstructure Momentum Miscalibration Mispricing Overconfidence Pattern recognition Post-earnings-announcement drift Prospect theory Reversal Risk Size effect
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