The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Behavioural Finance

  • Robert Bloomfield
Reference work entry


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.


Accruals 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 

JEL Classifications

This is a preview of subscription content, log in to check access.


  1. Abreu, D., and M.K. Brunnermeier. 2002. Synchronization risk and delayed arbitrage. Journal of Financial Economics 66: 341–360.CrossRefGoogle Scholar
  2. Ball, R., and P. Brown. 1968. An empirical evaluation of accounting income numbers. Journal of Accounting Research 6: 159–178.CrossRefGoogle Scholar
  3. Barberis, N., A. Shleifer, and R. Vishny. 1998. A model of investor sentiment. Journal of Financial Economics 49: 307–343.CrossRefGoogle Scholar
  4. Barberis, N., M. Huang, and T. Santos. 2001. Prospect theory and asset prices. Quarterly Journal of Economics 116: 1–53.CrossRefGoogle Scholar
  5. Barberis, N., M. Huang, and R.H. Thaler. 2006. Individual preferences, monetary gambles and stock market participation: A case for narrow framing. American Economic Review 96: 1069–1090.CrossRefGoogle Scholar
  6. Benartzi, S., and R.H. Thaler. 2001. Naïve diversification strategies in defined contribution savings plans. American Economic Review 91: 79–98.CrossRefGoogle Scholar
  7. Benartzi, S., and R.H. Thaler. 2004. Save more tomorrow™: Using behavioral economics to increase employee saving. Journal of Political Economy 112: S164–S187.CrossRefGoogle Scholar
  8. Bernard, V.L., and J. Thomas. 1990. Evidence that stock prices do not fully reflect the implications of current earnings for future earnings. Journal of Accounting and Economics 13: 305–341.CrossRefGoogle Scholar
  9. Bloomfield, R. 2002. The incomplete revelation hypothesis: Implications for financial reporting. Accounting Horizons 16: 233–244.CrossRefGoogle Scholar
  10. Bloomfield, R., and J. Hales. 2002. Predicting the next step of a random walk: Experimental evidence of regime-shifting beliefs. Journal of Financial Economics 65: 397–415.CrossRefGoogle Scholar
  11. Bloomfield, R., R. Libby, and M.W. Nelson. 2000. Underreactions, overreactions and moderated confidence. Journal of Financial Markets 3: 113–137.CrossRefGoogle Scholar
  12. Bloomfield, R., R. Libby, and M.W. Nelson. 2003. Over-reliance on previous years’ earnings. Contemporary Accounting Research 20: 1–31.CrossRefGoogle Scholar
  13. Coval, J., and T. Moskowitz. 2001. The geography of investment: Informed trading and asset prices. Journal of Political Economy 109: 811–841.CrossRefGoogle Scholar
  14. Coval, J.D., and T. Shumway. 2005. Do behavioral biases affect prices? Journal of Finance 60: 1–34.CrossRefGoogle Scholar
  15. Daniel, K., D. Hirshleifer, and A. Subrahmanyam. 1998. Investor psychology and security market under- and overreaction. Journal of Finance 53: 1839–1886.CrossRefGoogle Scholar
  16. DeBondt, W.F.M., and R.H. Thaler. 1985. Does the stock market overreact? Journal of Finance 40: 793–807.CrossRefGoogle Scholar
  17. DeLong, J.B., A. Shleifer, L.H. Summers, and R.J. Waldmann. 1990. Noise trader risk in financial markets. Journal of Political Economy 98: 703–738.CrossRefGoogle Scholar
  18. Fama, E.F. 1970. Efficient capital markets: A review of theory and empirical work. Journal of Finance 25: 383–417.CrossRefGoogle Scholar
  19. Fama, E.F. 1998. Market efficiency, long-term returns, and behavioral finance. Journal of Financial Economics 49: 283–306.CrossRefGoogle Scholar
  20. Frazzini, A. 2006. The disposition effect and underreaction to news. Journal of Finance 61: 2017–2046.CrossRefGoogle Scholar
  21. Gertner, R. 1993. Game shows and economic behavior: Risk taking on ‘card sharks’. Quarterly Journal of Economics 151: 507–521.CrossRefGoogle Scholar
  22. Gervais, S., and T. Odean. 2001. Learning to be overconfident. Review of Financial Studies 14: 1–27.CrossRefGoogle Scholar
  23. Griffin, D., and A. Tversky. 1992. The weighing of evidence and the determinants of confidence. Cognitive Psychology 24: 411–435.CrossRefGoogle Scholar
  24. Hirst, D.E., and P.E. Hopkins. 1998. Comprehensive income reporting and analysts’ valuation judgments. Journal of Accounting Research 36(Suppl): 47–75.CrossRefGoogle Scholar
  25. Huberman, G. 2001. Familiarity breeds investment. Review of Financial Studies 14: 659–680.CrossRefGoogle Scholar
  26. Kahneman, D., and A. Tversky. 1979. Prospect theory: An analysis of decision under risk. Econometrica 47: 263–292.CrossRefGoogle Scholar
  27. Kandel, E., and N.D. Pearson. 1995. Differential interpretation of public signals and trade in speculative markets. Journal of Political Economy 103: 831–872.CrossRefGoogle Scholar
  28. Kuhn, T.S. 1962. The structure of scientific revolutions. Chicago: University of Chicago Press.Google Scholar
  29. Kyle, A., and F.A. Wang. 1997. Speculation duopoly with agreement to disagree: Can overconfidence survive the market test? Journal of Finance 52: 2073–2090.CrossRefGoogle Scholar
  30. Lee, C.M.C., and B. Swaminathan. 2000. Price momentum and trading volume. Journal of Finance 55: 2017–2033.CrossRefGoogle Scholar
  31. Maines, L.A., and L.S. McDaniel. 2000. Effects of comprehensive-income characteristics on nonprofessional investors’ judgments: The role of financial- statement presentation format. Accounting Review 75: 179–207.CrossRefGoogle Scholar
  32. Malmendier, U., and G. Tate. 2005. CEO overconfidence and corporate investment. Journal of Finance 60: 2661.CrossRefGoogle Scholar
  33. Mehra, R., and E.C. Prescott. 1985. The equity premium: A puzzle. Journal of Monetary Economics 15: 145–161.CrossRefGoogle Scholar
  34. Milgrom, P., and N. Stokey. 1982. Information, trade and common knowledge. Journal of Economic Theory 26: 17–27.CrossRefGoogle Scholar
  35. Odean, T. 1998a. Are investors reluctant to realize their losses? Journal of Finance 53: 1775–1798.CrossRefGoogle Scholar
  36. Odean, T. 1998b. Volume, volatility, price, and profit when all traders are above average. Journal of Finance 53: 1887–1934.CrossRefGoogle Scholar
  37. Odean, T. 1999. Do investors trade too much? American Economic Review 89: 1279–1298.CrossRefGoogle Scholar
  38. Pontiff, J. 2006. Costly arbitrage and the myth of idiosyncratic risk. Journal of Accounting and Economics 42: 35–52.CrossRefGoogle Scholar
  39. Shefrin, H. 2005. Behavioral Corporate Finance. New York: McGraw-Hill/Irwin.Google Scholar
  40. Shefrin, H., and M. Statman. 1985. The disposition to sell winners too early and ride losers too long: Theory and evidence. Journal of Finance 40: 777–790.CrossRefGoogle Scholar
  41. Shiller, R.J. 1981. Do stock prices move too much to be justified by subsequent changes in dividends? American Economic Review 71: 421–436.Google Scholar
  42. Shleifer, A., and R.W. Vishny. 1997. The limits of arbitrage. Journal of Finance 52: 35–55.CrossRefGoogle Scholar
  43. Sloan, R. 1996. Do stock prices fully reflect information in accruals and cash flows about future earnings? Accounting Review 71: 289–315.Google Scholar
  44. Thaler, R.H., and E.J. Johnson. 1990. Gambling with the house money and trying to break even: The effects of prior outcomes on risky choice. Management Science 36: 643–660.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Robert Bloomfield
    • 1
  1. 1.