Behavioural Finance: A Synthetic Review of Literature and Future Development
Literature Review
Abstract
This article aims to review theories developed in the scope of behavioural finance and discuss future directions the subject could go. Full rationality of homo-economicus assumption dominated the finance subject and asset pricing theories for decades. Nevertheless, given the fact that the participants in the financial market are human-being, they are subject to cognitive biases and make irrational decisions in their investment due to animal spirits. It ignites the spark of behavioural finance, explaining irrational exuberance and anomalies in asset price. There are two possible directions for further research, either backwards or forwards. Backward research refers to neural mechanisms for financial decision-making while forward research is about developing sound behavioural asset pricing models.
Keywords: Behavioural Finance, Behavioural Asset Pricing Model, Cognitive Biases, Market Anomalies, Neuro-Finance
JEL Classification: D53, G02, G12, G41
Fu, Changfa, BehaviouralFinance: A Synthetic Review of Literature and Future Development (April 25, 2022). Available at SSRN: https://dx.doi.org/10.2139/ssrn.4107830.
REVIEWED by Frontiers in Psychology