Development of Behavioural Finance - Essay Example

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Development of Behavioural Finance

This was followed by Selden’s ground breaking work on the stock exchange where he attempted to explain people’s financial behaviour in the stock exchanges (Selden, 1912). Further work on behavourial finance continued through the efforts of psychologists such as Leon Festinger who introduced the concept of cognitive dissonance (Festinger et al., 1956). The more modern trends in behavourial finance were placed by Tversky and Kahneman who introduced the availability heuristic that delineated the financial probability of decision making by a person (Tversky & Kahneman, 1973). This idea was followed by another expected utility theory that critiqued the original theory. This new theory delineated a descriptive model of decision making when faced with risks. The emerging model was espoused as the prospect theory (Kahneman & Tverksy, 1979). The prospect theory presented by Kahneman and Tversky has also been suggested as the alternative financial explanation for people making less than expected decisions in a risky market situation. The sixties saw the application of cognitive psychology to the processing of information by the brain. This stood in contrast to behavioural models. The newly emerging cognitive models were being compared to each other such as those presented by Ward Edwards, Daniel Kahneman and Amos Tversky. ...Show more

Summary

Development of Behavioural Finance Behavioural finance deals with the study of the effects of various social, emotional and cognitive factors that affect the financial decision making of individuals. The major concern of behavioural finance is to track down why individuals operating in a market tend to make the choices they make…
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