BEHAVIOURAL FINANCE

Abstract

Behavioural finance involves the exploitation of psychology in the formulation of financial decisions. Stock prices in capital markets usually depend on the information that is revealed by various financial entities. Information regarding efficient capital markets is one where the existing stock prices reflect the data available to the public domain (Shleifer, 2000). Correspondingly, behavioural finance is a factor that has been largely exploited in modern capital markets to set stock prices and predict future performances based on the returns (Ackert & Deaves, 2009). Unlike traditional methods, behavioural finance limits the market and usually involves much informational inefficiencies in the markets, which makes it hard to predict the performance of stocks in the market due to existing behavioural biases.