Financial Decision-Making in Markets and Firms: A Behavioral Perspective / Werner F. M. De Bondt, Richard H. Thaler.

Format:

Book

Author/Creator:

De Bondt, Werner F. M.

Contributor:

National Bureau of Economic Research.

Thaler, Richard H.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4777.

NBER working paper series no. w4777

Language:

English

Subjects (All):

Finance--Decision making.

Finance.

Corporations--Finance.

Corporations.

Capital investments--Decision making.

Capital investments.

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Financial Decision-Making in Markets and Firms

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1994.

Cambridge, Massachusetts : National Bureau of Economic Research, 1994.

Summary:

In its attempt to model financial markets and the behavior of firms, modern finance theory starts from a set of normatively appealing axioms about individual behavior. Specifically, people are said to be risk-averse expected utility maximizers and unbiased Bayesian forecasters, i.e., agents make rational choices based on rational expectations. The rational paradigm may be criticized, however, because (1) the assumptions are descriptively false and incomplete, and (2) the theory often lacks predictive power. One way to make progress is to characterize actual decision- making behavior. Efforts along these lines are made by behavioral economists and psychologists. This paper provides a selective review of recent work in behavioral finance. First, we ask why economists should be concerned with the psychology of decision-making. Next, we discuss a series of key behavioral concepts, e.g., people's well-known tendencies to give too much weight to vivid information and to show excessive self-confidence. The body of the paper illustrates the relevance of these concepts to important topics in investment theory and corporate finance. In each case, behavioral finance offers a new perspective on results that are anomalous within the standard approach.

Notes:

Print version record

June 1994.