Eric Barthalon
- Published in print:
- 2014
- Published Online:
- November 2015
- ISBN:
- 9780231166287
- eISBN:
- 9780231538305
- Item type:
- chapter
- Publisher:
- Columbia University Press
- DOI:
- 10.7312/columbia/9780231166287.003.0009
- Subject:
- Economics and Finance, Behavioural Economics
This chapter describes a few simple models that explain financial behavior by the perceived returns on financial assets and thereby provide evidence of positive feedback from past returns to the ...
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This chapter describes a few simple models that explain financial behavior by the perceived returns on financial assets and thereby provide evidence of positive feedback from past returns to the demand for risky assets. These models bring to light nonlinear relationships between perceived returns and observed investors' behavior. The chapter presents a few examples that are particularly relevant with respect to the dynamics of financial instability. The discussion begins with some empirical evidence of a positive feedback from past equity returns into the demand for equities. As this demand exhibits a nonlinear pattern that is similar to the one found by Maurice Allais in his HRL formulation of the supply of money, the findings are compared with those of Allais. The chapter concludes with a discussion of the policy implications of positive feedback.Less
This chapter describes a few simple models that explain financial behavior by the perceived returns on financial assets and thereby provide evidence of positive feedback from past returns to the demand for risky assets. These models bring to light nonlinear relationships between perceived returns and observed investors' behavior. The chapter presents a few examples that are particularly relevant with respect to the dynamics of financial instability. The discussion begins with some empirical evidence of a positive feedback from past equity returns into the demand for equities. As this demand exhibits a nonlinear pattern that is similar to the one found by Maurice Allais in his HRL formulation of the supply of money, the findings are compared with those of Allais. The chapter concludes with a discussion of the policy implications of positive feedback.
Victor Ricciardi
- Published in print:
- 2017
- Published Online:
- May 2017
- ISBN:
- 9780190269999
- eISBN:
- 9780190270025
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780190269999.003.0002
- Subject:
- Economics and Finance, Financial Economics
This chapter provides an overview of the emerging cognitive and emotional themes of behavioral finance that influence individual behavior. The behavioral finance perspective of risk incorporates both ...
More
This chapter provides an overview of the emerging cognitive and emotional themes of behavioral finance that influence individual behavior. The behavioral finance perspective of risk incorporates both qualitative (subjective) and quantitative (objective) aspects of the decision-making process. An emerging subject of research interest and investigation in behavioral finance is the inverse (negative) relation between perceived risk and expected return (perceived return). The chapter highlights important topics such as representativeness, framing, anchoring, mental accounting, control issues, familiarity bias, trust, worry, and regret theory. It also examines the role of negative affective reactions on financial decisions. A host of biases that depend on specific aspects of the financial product or investment service influence the judgment and decision-making process of most financial players.Less
This chapter provides an overview of the emerging cognitive and emotional themes of behavioral finance that influence individual behavior. The behavioral finance perspective of risk incorporates both qualitative (subjective) and quantitative (objective) aspects of the decision-making process. An emerging subject of research interest and investigation in behavioral finance is the inverse (negative) relation between perceived risk and expected return (perceived return). The chapter highlights important topics such as representativeness, framing, anchoring, mental accounting, control issues, familiarity bias, trust, worry, and regret theory. It also examines the role of negative affective reactions on financial decisions. A host of biases that depend on specific aspects of the financial product or investment service influence the judgment and decision-making process of most financial players.
