7. Behavioral Finance: The Role of Psychology

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Financial Markets (ECON 252)

Behavioral Finance is a relatively recent revolution in finance that applies insights from all of the social sciences to finance. New decision-making models incorporate psychology and sociology, among other disciplines, to explain economic and financial phenomenon, such as erratic stock price variations. Psychological patterns such as overconfidence and perceived kinks in the value function seem to impact financial decision-making, but are not included in classical theories such as the Expected Utility Theory. Kahneman and Tversky’s Prospect Theory addresses such issues and sheds light on irrational deviations from traditional decision-making models.

00:00 – Chapter 1. What Is Behavioral Finance?
09:01 – Chapter 2. Market Volatility: Random, or Socially Influenced? A Present Value Analysis
19:58 – Chapter 3. Overconfidence: Its Ubiquity and Impact on Financial Markets
38:29 – Chapter 4. The Kahneman and Tversky Prospect Theory or, How People Make Choices
58:50 – Chapter 5. The Regret Theory and Fashion as a Measure of the Market

Complete course materials are available at the Open Yale Courses website: http://open.yale.edu/courses

This course was recorded in Spring 2008.

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