A Survey of Behavioral Finance Summary
In this handbook, Barberis and Thaler define the differences between traditional finance and behavioral finance.
Traditional finance is rational.Rationality means two things; correct Bayesian Updating and choises consistent with expected utility. On the other hand behavioral finance assumes that market is not fully rational and analyzes the facts when the some of the princibles are loosen up.
This essay also discusses about two main topics; limits to arbitrage and psychology. These two topics are known as the two buildings blocks of the behaviour finance.
In the normal markets security prices equal to fundamental value.In this sitiuation. …show more content…
In the handbook they explains the cross-section of average returns. They document that one group of stocks earns higher average returns than another. These facts have come to be known as “anomalies” because they cannot be explained by the simplest and most intuitive model of risk and return in the financial economist’s toolkit, the Capital Asset Pricing Model, or CAPM. This is explainin by the size Premium, long term