Behavioral Finance

David Hirshleife ()
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David Hirshleife: Merage School of Business, University of California, Irvine, California 92697
Authors registered in the RePEc Author Service: David Hirshleifer

Annual Review of Financial Economics, 2015, vol. 7, issue 1, 133-159

Abstract: Behavioral finance studies the application of psychology to finance, with a focus on individual-level cognitive biases. I describe here the sources of judgment and decision biases, how they affect trading and market prices, the role of arbitrage and flows of wealth between more rational and less rational investors, how firms exploit inefficient prices and incite misvaluation, and the effects of managerial judgment biases. There is a need for more theory and testing of the effects of feelings on financial decisions and aggregate outcomes. Especially, the time has come to move beyond behavioral finance to social finance, which studies the structure of social interactions, how financial ideas spread and evolve, and how social processes affect financial outcomes.

Keywords: Attention; feelings; heuristics; investor psychology; overconfidence; reference dependence; social finance (search for similar items in EconPapers)
JEL-codes: G02 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (11)

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Working Paper: Behavioral Finance (2014)
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