Chapter 22

Ten Things You Need to Understand about Behavioral Finance

In This Chapter

arrow Identifying the many irrational behaviors involved in corporate finance

arrow Realizing that emotions and personal judgments often play a role in financial decisions

arrow Knowing how to measure irrational behavior

Behavioral finance was developed as the result of the need to explain how corporations and the people within them behave, driving an overlap between the fields of finance and psychology. Very broadly speaking, behavioral finance looks at the actions and reactions made by people in order to determine how to better understand them and make better decisions. Of course, each anomaly in behavior has developed for good reasons, but they also quite frequently put people in a position of lower efficiency, weaker returns, or higher risk. So you need to go out of your way to study what these behaviors are and what causes them, measure their impact on financial performance, and seek to utilize these behaviors more effectively or else minimize them as much as possible.

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