Behavioral Finance

Abstract

Noting that, in recent years, dozens of academic articles have been written on the subject of behavioral finance, the authors first propose a brief review of the literature and argue that its main message is that behavioral factors affect virtually every aspect of finance—from prices of individual stocks to absolute returns and from individual retirement planning to investor confidence. Yet, they identify a void with respect to discussions as to how active portfolio managers have long applied behavioral finance to the investment process. They go on to explain some market anomalies created as a result of human error and detail a few ways in which portfolio managers can use behavioral observations to manage clients' funds.