Risk in Modern Finance
Summary :
Table of Contents
- Introduction
- The field of behavioral finance
- The finding of Kahneman and Tversky
- The role played by overconfidence people's behavior
- Conclusion
Abstract
modern finance and much of economic theory is based on the assumption that individuals that make up the marketplace in which transactions occur, act rationally and know every piece of information associated with their decision-making process in purchasing or selling a product (whether it is a stock or a banana). These assumptions are shaky and dangerous, and researchers, especially academics in the fields of finance and economics, have concluded that this is not the case. Hundreds of examples have been documented on events where irrational behavior and errors repeatedly in judgment occurred. In Against The Gods, Peter L. Bernstein states that there is proof of evidence that "reveals repeated patterns of irrationality, inconsistency, and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty" (304). Are markets governed by psychology of the investors or is the market an entity of itself and makes its own decisions?
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