Behavioural Finance
A Different Perspective – Individual and Institutional
Traditional Finance is based upon NeoClassical Economics where risk aversion , utility maximisation and rationality are the key words to describe the investors . Also markets are assumed to be efficient and it is assumed that prices incorporate and reflect all available and relevant information.
Behavioural finance applies Psychology to finance and attempts to understand and explain observed investor and market behaviour .
Behavioural finance Micro (BFMI ) questions rationality and decision making process of individuals
Behavioural Finance Macro ( BFMA ) questions efficiency of markets and considers market anomalies that distinguish markets from the efficient markets of traditional finance
Key Differences have been summarised in the link below
( other terms to understand are neuro economics and adaptive finance )
It is advisable to construct investment solutions using an integrated approach that uses traditional finance to build a rational solution and then make adjustments using Behavioural insights
