Comprehensive Review of Literature on Behavioural Finance
Keywords:
Finance, Behavior, Heuristics, Rationality, Herd, EMHAbstract
Investors are rational and that they consider all available information in portfolio investment decision process is the main assumption of standard finance and this holds true by Efficient Market Hypothesis (EMH), being an important theory of Standard finance. Over the years this assumption has been challenged by the psychologists and they argue that investors can’t be rational as their decisions are influenced by cognitive and psychological errors. The work done by the various prominent psychologists in this direction resulted in the development of a new branch of financial economics, known as Behavioural Finance. Behavioural finance considers how various psychological traits affect the way investors make their investment decisions. Against this backdrop, in present paper a modest attempt has been made to review various studies in this area so as to have clear understanding of the subject and to see how significant it is in financial decision making. From the review of literature it is deduced that behavioural finance tries to fill the gap between actual behavior (Normal behavior) and expected behavior (Rational Behavior), however, currently there is no unified theory of behavioural finance that gives a proper place to the factors influencing financial decisions of investors.
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