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Financial Markets - Lecture 7

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Lecture 7 - Behavioral Finance: The Role of Psychology

Behavioral Finance is a relatively recent revolution in finance that applies insights from all of the social sciences to finance. New decision-making models incorporate psychology and sociology, among other disciplines, to explain economic and financial phenomenon, such as erratic stock price variations. Psychological patterns such as overconfidence and perceived kinks in the value function seem to impact financial decision-making, but are not included in classical theories such as the Expected Utility Theory. Kahneman and Tversky's Prospect Theory addresses such issues and sheds light on irrational deviations from traditional decision-making models.

Prof. Robert Shiller
ECON 252 Financial Markets, Spring 2008
(Yale University: Open Yale)
http://oyc.yale.edu
Date accessed: 2009-01-06
License: Creative Commons BY-NC-SA

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