Behavioral Finance And Its Effects On The Economy

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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…show more content…
It also discusses that how there is enough data to prove that being rational at all times with accurate evidence isn’t realistic. You can still make a rational decision, but suffer from a loss. You can make an irrational decision and receive a profit. We can’t predict the future. Conventional Finance Many finance specialist use conventional finance to assist them with determining and analyzing stock performance. According to Albert Phung’s article on Investopedia titled “Behavioral Finance Background” many models have been created from conventional finance such as the Capital Asset Pricing Model and the Efficient Market Hypothesis. This section describes why behavioral finance should have a more active role in finance. This article states “academics in both finance and economics started to find anomalies and behaviors that couldn 't be explained by theories available at the time. While these theories could explain certain ‘idealized’ events, the real world proved to be a very messy place in which market participants often behaved very unpredictably” (Phung, 2014). Conventional and behavioral finance is compared to one another throughout this article. Phung states that behavioral finance is designed to explain our actions, while conventional finance is designed to explain the actions of the “wealth maximizers”, otherwise known as the
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