Behavioral Finance vs. Traditional Finance

This chapter explored the development of behavioral finance theories from the traditional finance theories in detail. Traditional financial theory has assumed that investors are perfectly well-informed in making financial decisions for many years. However, the reality shows that these assumptions are not valid, especially over the last two decades. It is observed that investors exhibit irrational behaviors by acting with emotions even if they are well-informed. Because of the awareness of the importance human psychology in investment decisions, behavioral researchers have advanced their research in this direction. Thus, behavioral finance theories have been developed with this in mind.