Behavioral Finance Essay

1310 Words 6 Pages
Economics is probably the science that arguably has had the most impact in today’s times. In fact it can barely be called a science in a strict sense, since human behavior is not governed by laws of nature unlike other non living objects, which makes the prediction and forecasting stock prices, economic conditions all the more difficult. In recent decades economists have tried to give a more structured and mathematical explanation to their theories concerning how human beings make their decisions. However these theories have come under immense criticism as they don’t hold true in real time. In reality, human beings rarely behave rationally which is the basic assumption in many of the economic theories; rather we make a lot of our …show more content…
They discovered that people systematically overreact to unexpected and dramatic news events results in substantial weak-form inefficiencies in the Stock market. This was both surprising and profound.

Behavioral finance is a relatively new branch of economics which is gaining acceptance in the academic as well as non academics world. In simple language, is seeks to explain how various social and psychological attributes of human beings affect their behavior, particularly decision making, while making financial and investment decisions. What drives us to make seemingly rational yet blatantly irrational decisions? For example; even when people were constantly warned by experts that Speak Asia, an alleged market research company was nothing more than a Ponzi scheme, they still invested money in it. What drives this brave risk taking behavior on one hand and loss aversion on the other?
An interesting TED talk by Dan Ariely points this flaw in humans out, “Are we control of our own decisions” he asks. The crux of his point was that human beings have a very strong tendency to make decisions not in absolute, but in relative terms. Dan Ariely is a behavioral economics professor at MIT, a very interesting experiment he did to prove his point was as follows: He presented the students at MIT with the following economist newspaper

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