Investor Psychology Perspective: a deep review on Behavioral finance

Abstract

Determining the fair value of financial assets has been a controversial subject since the 1990s, and whether this value depends only on fundamentally calculated pricing models or if there are other psychological factors that affects it. The field of behavioral finance addressed these issues and provided some asset pricing models that incorporate behavioral aspects of decision-making and explained the different heuristics and biases behind these market reactions that lacked fundamental explanation. Behavioral finance is a relatively new paradigm that emerged to try to fill in the gaps in "Modern Finance". Behavioral finance models did not develop specific strategies to beat the market, however, it has highlighted lots of argumentative ideas that have promising directions of further research and analysis that may be very useful in public policy and welfare analysis, as well as in wealth management. In this paper, the author is presenting some of these behavioral finance theories and how they tackle the psychological aspects in investors’ rational and irrational investment decisions.