Behavioral Finance

This reliable resource provides a comprehensive view of behavioral finance and its psychological foundations, as well as its applications to finance. Comprising contributed chapters written by distinguished authors from some of the most influential firms and universities in the world, Behavioral Finance provides a synthesis of the most essential elements of this discipline, including psychological concepts and behavioral biases, the behavioral aspects of asset pricing, asset allocation, and market prices, as well as investor behavior, corporate managerial behavior, and social influences.

• Uses a structured approach to put behavioral finance in perspective
• Relies on recent research findings to provide guidance through the maze of theories and concepts
• Discusses the impact of sub-optimal financial decisions on the efficiency of capital markets, personal wealth, and the performance of corporations

Behavioral finance has quickly become part of mainstream finance. If you need to gain a better understanding of this topic, look no further than this book.

Acknowledgments ix

Part I Foundation and Key Concepts 1

1 Behavioral Finance: An Overview 3
H. Kent Baker, John R. Nofsinger

2 Traditional versus Behavioral Finance 23
Robert Bloomfield

3 Behavioral Finance: Application and Pedagogy in Business Education and Training 39
Rassoul Yazdipour, James A. Howard

4 Heuristics or Rules of Thumb 57
Hugh Schwartz

5 Neuroeconomics and Neurofinance 73
Richard L. Peterson

6 Emotional Finance: The Role of the Unconscious in Financial Decisions 95
Richard J. Taffler, David A. Tuckett

7 Experimental Finance 113
Robert Bloomfield, Alyssa Anderson

8 The Psychology of Risk 131
Victor Ricciardi

9 Psychological Influences on Financial Regulation and Policy 151
David Hirshleifer, Siew Hong Teoh

Part II Psychological Concepts and Behavioral Biases 169

10 Disposition Effect 171
Markku Kaustia

11 Prospect Theory and Behavioral Finance 191
Morris Altman

12 Cumulative Prospect Theory: Tests Using the Stochastic Dominance Approach 211
Haim Levy

13 Overconfidence 241
Markus Glaser, Martin Weber

14 The Representativeness Heuristic 259
Richard J. Taffler

15 Familiarity Bias 277
Hisham Foad

16 Limited Attention 295
Sonya S. Lim, Siew Hong Teoh

17 Other Behavioral Biases 313
Michael Dowling, Brian Lucey

Part III Behavioral Aspects of Asset Pricing 331

18 Market Inefficiency 333
Raghavendra Rau

19 Belief- and Preference-Based Models 351
Adam Szyszka

Part IV Behavioral Corporate Finance 373

20 Enterprise Decision Making as Explained in Interview-Based Studies 375
Hugh Schwartz

21 Financing Decisions 393
Jasmin Gider, Dirk Hackbarth

22 Capital Budgeting and Other Investment Decisions 413
Simon Gervais

23 Dividend Policy Decisions 435
Itzhak Ben-David

24 Loyalty, Agency Conflicts, and Corporate Governance 453
Randall Morck

25 Initial Public Offerings 475
François Derrien

26 Mergers and Acquisitions 491
Ming Dong

Part V Investor Behavior 511

27 Trust Behavior: The Essential Foundation of Financial Markets 513
Lynn A. Stout

28 Individual Investor Trading 523
Ning Zhu

29 Individual Investor Portfolios 539
Valery Polkovnichenko

30 Cognitive Abilities and Financial Decisions 559
George M. Korniotis, Alok Kumar

31 Pension Participant Behavior 577
Julie Richardson Agnew

32 Institutional Investors 595
Tarun Ramadorai

33 Derivative Markets 613
Peter Locke

Part VI Social Influences 629

34 The Role of Culture in Finance 631
Rohan Williamson

35 Social Interactions and Investing 647
Mark S. Seasholes

36 Mood 671
Tyler Shumway

Part VII Answers to Chapter Discussion Questions 681

Index 727

H. KENT BAKER, PHD, CFA, CMA, is University Professor of Finance and Kogod Research Professor at the Kogod School of Business, American University. He has published extensively in leading academic and professional finance journals including the Journal of Finance Journal of Financial and Quantitative Analysis,Financial Management, Financial Analysts Journal, Journal of Portfolio Management, and Harvard Business Review. Professor Baker is recognized as one of the most prolific authors in finance during the past fifty years. He has consulting and training experience with more than 100 organizations and has been listed in fifteen biographies.

JOHN R. NOFSINGER is an Associate Professor of Finance and Nihoul Faculty Fellow at Washington State University. He is one of the world's leading experts in behavioral finance and is a frequent speaker on this topic at investment management conferences, universities, and academic conferences. Nofsinger has often been quoted or appeared in the financial media, including the Wall Street Journal, Financial Times, Fortune, BusinessWeek, Bloomberg, and CNBC. He writes a blog called "Mind on My Money" at psychologytoday.com.

BEHAVIORAL FINANCE

The Robert W. Kolb Series in Finance is an unparalleled source of information dedicated to the most important issues in modern finance. Each book focuses on a specific topic in the field of finance and contains contributed chapters from both respected academics and experienced financial professionals. As part of the Robert W. Kolb Series in Finance, Behavioral Finance aims to provide a comprehensive understanding of the key themes associated with this growing field and how they can be applied to investments, corporations, markets, regulations, and education.

Behavioral finance has the potential to explain not only how people make financial decisions and how markets function, but also how to improve them. This book provides invaluable insights into behavioral finance, its psychological foundations, and its applications to finance.

Comprising contributed chapters by a distinguished group of academics and practitioners, Behavioral Finance provides a synthesis of the most essential elements of this discipline. It puts behavioral finance in perspective by detailing the current state of research in this area and offers practical guidance on applying the information found here to real-world situations.

Behavioral finance has increasingly become part of mainstream finance. If you intend on gaining a better understanding of this discipline, look no further than this book.