Working Paper: NBER ID: w9222
Authors: Nicholas Barberis; Richard Thaler
Abstract: Behavioral finance argues that some financial phenomena can plausibly be understood using models in which some agents are not fully rational. The field has two building blocks: limits to arbitrage, which argues that it can be difficult for rational traders to undo the dislocations caused by less rational traders; and psychology, which catalogues the kinds of deviations from full rationality we might expect to see. We discuss these two topics, and then present a number of behavioral finance applications: to the aggregate stock market, to the cross-section of average returns, to individual trading behavior, and to corporate finance. We close by assessing progress in the field and speculating about its future course.
Keywords: No keywords provided
JEL Codes: G11; G12; G30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| psychological factors (D91) | trading behaviors (G41) |
| trading behaviors (G41) | market prices (P22) |
| trading behaviors (G41) | market returns (G19) |
| psychological factors (D91) | market dislocations (D53) |
| market dislocations (D53) | market prices (P22) |
| market dislocations (D53) | market returns (G19) |