The End of Behavioral Finance - 4700 Words

CFA Institute The End of Behavioral Finance Author(s): Richard H. Thaler Source: Financial Analysts Journal, Vol. 55, No. 6, Behavioral Finance (Nov. - Dec., 1999), pp. 12-17 Published by: CFA Institute Stable URL: http://www.jstor.org/stable/4480205 Accessed: 17/04/2009 10:10 Your use of the JSTOR archive indicates your acceptance of JSTOR s Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR s Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the†¦show more content†¦The argumentthat asset prices are set by rational investors is part of the grand oral traditionin economics and is often attributedto Milton Friedman, one of the greatesteconomists of the century and one of the greatestdebatersof all time. But the argument has two fundamental problems. First, even if asset priceswere set only by rationalinvestors in the aggregate, knowing what individual investors are doing might still be of interest. Second, although the argumentis intuitively appealing and reassuring, its adherents have rarely spelled it out carefully. Suppose a markethas two kinds of investors: rational investors (rationals), who behave like agents in economics textbooks,and quasi-rational investors (quasi s),people who are trying as hard as they can to make good investmentdecisions but make predictablemistakes. Suppose also that two assets in this market,X and Y, areobjectivelyworth the same amount but cannotbe transformedfrom one into the other. Finally,assume that the quasi s thinkX is worth more thanY, an opinion thatcould change (quasi soften changetheirminds) while the rationalsknow that X and Y are worth the same. What conditions are necessary to assure that the prices of X and Y will be the same, as they would be in a world with onlyShow MoreRelatedThe Mortgage Crisis And Stock Market Decline Essay1128 Words   |  5 Pagesis to evaluate the methods in which behavioral finance can be used to elucidate the mortgage crisis and stock market decline. There will be personag es’ retorts, specifically investors in the stock market, evidential psychological biases, and a clarification of behavioral finance. In conclusion will be how I can use behavioral finance to overcome some of the psychological biases that ensue. 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