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A comprehensive review of behavioral biases in financial decision-making: from classical finance to behavioral finance perspectives
- Source :
- Journal of Business Economics and Management, Vol 25, Iss 5 (2024)
- Publication Year :
- 2024
- Publisher :
- Vilnius Gediminas Technical University, 2024.
-
Abstract
- This paper offers a detailed analysis of the evolution of financial decision-making theories, focusing on the shift from classical finance to behavioral finance. Classical finance theories, including the Efficient Market Hypothesis and Modern Portfolio Theory, assume that investors behave rationally and that the market is efficient. However, these theories have faced criticisms highlighting the importance of considering irrational behaviors in financial markets. Behavioral finance addresses this gap by integrating psychological insights into financial decision-making. This study systematically reviews the literature on behavioral biases that affect individual investors, identifying fundamental biases and their impact on investment decisions. The analysis emphasizes the role of cognitive limitations and psychological tendencies in shaping market dynamics, influencing asset pricing, investment strategies, and market returns. The research also notes a shift in focus from market-level outcomes to the behavior of individual investors, with an increase in publications. The paper concludes that understanding investors’ biases is crucial for developing effective risk management strategies and investment recommendations, ultimately leading to improved market performance. The findings underscore the growing importance of behavioral finance in explaining investor behavior and market anomalies, highlighting areas for future research in this evolving field.
Details
- Language :
- English
- ISSN :
- 16111699 and 20294433
- Volume :
- 25
- Issue :
- 5
- Database :
- Directory of Open Access Journals
- Journal :
- Journal of Business Economics and Management
- Publication Type :
- Academic Journal
- Accession number :
- edsdoj.917d54bcc69947b188df81beefec0579
- Document Type :
- article
- Full Text :
- https://doi.org/10.3846/jbem.2024.22314