Investor Behavior: The Psychology of Financial Planning and Investing

CHAPTER 1

Investor Behavior: An Overview

H. Kent Baker

University Professor of Finance, Kogod School of Business, American University

Victor Ricciardi

Assistant Professor of Financial Management, Department of Business Management, Goucher College

INTRODUCTION

In the 1990s, the terms behavioral finance and behavioral economics started to appear in academic journals for finance professors, practitioner publications for investment professionals, investing magazines for novice investors, and everyday newspapers read by the general public (Ricciardi and Simon 2000). The foundation of behavioral finance and the subtopic of investor behavior, however, can be traced back throughout financial history in events such as the speculative behavior during tulip mania in the 1600s. Books published in the 1800s and early 1900s about psychology and investing marked the beginning of the theoretical basis for today's theories and concepts about investor behavior (Ricciardi 2006). Finance and the role of money are fundamental underpinnings of many important events throughout history (Ferguson 2008) and the development of financial innovations (Goetzmann and Rouwenhorst 2005). For example, Bernstein (1996) provides an extensive time line of risk throughout history and its application in the world of finance. Another important work in this arena is Rubinstein (2006), who depicts a historical anthology of investment theory. In recent times, the Internet stock market bubble of the late 1990s and the financial ...