Behavioral Finance And Its Effects On The Economy

1180 Words Dec 3rd, 2014 5 Pages
Introduction
Throughout the history of finance mankind has devised various ways to predict future costs, price changes, changes in supply and demand, and changes to bond and stock prices. We’ve created sophisticated models and formulas to help us make financial decisions. Although, we can’t always prepare for the inevitable depression, inflation, stock bubble bursts, long or short term shocks to the economy, and changes in taste, we can try our best to protect ourselves financially from our own irrational behavior and decisions when it comes to finance. With our sophisticated technology shouldn’t everyone generally come to the same conclusion when it comes to changes in the stock or bond market? What causes people to act differently to changes in our economy? Behavioral finance was designed provide us with theories to acknowledge these errors we make, and allows us to create ways to overcome our irrational decisions in finance. This research document will uncover various theories and biases to help determine if behavioral finance should be implemented in financial practice.
Werner De Bondt, Gulnur Muradoglu, Hersh Shefrin, and Sotiris K. Staikouras were the authors of an article titled “Behavioral Finance: Quo Vadis?” This article provides it readers with an overview about what Behavioral Finance is and why it should be implemented more in the finance field. This article states that Behavioral finance was designed to combine finance and psychology (Bondt et al, 2008, p7). It…
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