A Systematic Literature Review on Evolution of Behavioral Finance

Abstract

Traditional finance is a knowledge base that summarizes the concepts and theories based on principle of rationality to take financial decisions. Standard finance theories are based on an underlying concept that investor act carefully and objectively while making their financial decisions. In addition, individual investor is assumed to behave rationally keeping in mind the risk and return involved. However, the researchers in psychology interpret that the financial decisions are often made in an irrational manner. Therefore, a new field of behavioral finance has evolved in past few decades to explain how personal, social and psychological factors help an individual to make their financial decisions. Behavioral finance; an emerging and prospective field has been developed with the input taken from the field of psychology and finance which tries to explain the puzzling factor in stock market fluctuations. It is defined as “study of the influence of socio-psychological factors on asset price”. The behavioral and psychological insights have emerged as an application of economics with psychology, which seeks to provide an explanation for people’s irrational financial decisions. It is a combination of psychology, sociology, and finance. The paper here tries to generate a procedural study to provide a systematic review of the evolution of behavioral finance theories and concepts. The study tries to explain how the assumptions of standard finance theories fail to provide an explanation of various anomalies, which led to an evolution of Behavioral Finance.