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Article
Publication date: 13 May 2020

Hersh Shefrin

There was unfinished business to address in the version of the planner–doer model developed in Thaler and Shefrin (1981). The unfinished business involved identifying and modeling…

434

Abstract

Purpose

There was unfinished business to address in the version of the planner–doer model developed in Thaler and Shefrin (1981). The unfinished business involved identifying and modeling the crucial roles played by temptation and mental accounting in pensions and savings behavior. The present paper has two objectives.

Design/methodology/approach

The first objective is to describe the key lessons learned in transitioning from the model in Thaler and Shefrin (1981) to the model in Shefrin and Thaler (1988), a transition which addressed some of the unfinished business. The second objective is to describe as yet unfinished business associated with developing a multicommodity, intertemporal version of the planner–doer framework, incorporating the concepts of temptation and mental accounting, to replace the neoclassical theory of the consumer.

Findings

Doing so will provide a theoretical foundation for nudges related to household budgeting, spending, saving, borrowing and investing.

Originality/value

This paper presents the first behavioral theory of the consumer, focusing on the manner in which consumers actually make decisions about budgeting, spending. borrowing and saving. The approach in the paper can be viewed as a behavioral counterpart to the neoclassical theory of the consumer. In contrast to the neoclassical approach, which assumes that consumers set and follow utility maximizing budgets, the empirical evidence indicates that only a small minority of consumers describe themselves as setting and following budgets. The behavioral theory presented here focuses on the heuristic nature of consumers' actual budgeting processes and extends the approach described in Thaler and Shefrin's 1981 seminal paper on self-control. The core of the present paper is a working paper which Shefrin and Thaler began in 1980, and as such represents unfinished business from that time. The first part of this paper describes earlier unfinished business from the 1981 framework that the authors subsequently addressed as they developed the behavioral life cycle hypothesis during the 1980s.

Details

Review of Behavioral Finance, vol. 12 no. 1
Type: Research Article
ISSN: 1940-5979

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Article
Publication date: 18 May 2020

Meir Statman

The purpose of this paper is to depict how the author's way from standard finance to the first and second generations of behavioral finance illustrates the ongoing general…

1362

Abstract

Purpose

The purpose of this paper is to depict how the author's way from standard finance to the first and second generations of behavioral finance illustrates the ongoing general transition.

Design/methodology/approach

The first generation, starting in the early 1980s, largely accepted standard finance's notion of people's wants as “rational” wants – restricted to the utilitarian benefits of high returns and low risk. That first generation commonly described people as “irrational” – succumbing to cognitive and emotional errors and misled on their way to their rational wants. The second generation describes people as normal.

Findings

It begins by acknowledging the full range of people's normal wants and their benefits – utilitarian, expressive and emotional – distinguishes normal wants from errors and offers guidance on using shortcuts and avoiding errors on the way to satisfying normal wants. People's normal wants include financial security, nurturing children and families, gaining high social status and staying true to values. People's normal wants, even more than their cognitive and emotional shortcuts and errors, underlie answers to important questions of finance, including saving and spending, portfolio construction, asset pricing and market efficiency.

Originality/value

The article identifies that people's normal wants include financial security, nurturing children and families, gaining high social status and staying true to values. People's normal wants, even more than their cognitive and emotional shortcuts and errors, underlie answers to important questions of finance, including saving and spending, portfolio construction, asset pricing and market efficiency.

Details

Review of Behavioral Finance, vol. 12 no. 1
Type: Research Article
ISSN: 1940-5979

Keywords

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Article
Publication date: 6 May 2020

Robert Hudson and Yaz Gulnur Muradoglu

The paper aims to provide the individual routes of the authors into behavioural finance in order to introduce the special issue.

1338

Abstract

Purpose

The paper aims to provide the individual routes of the authors into behavioural finance in order to introduce the special issue.

Design/methodology/approach

The paper provides the background to the authors' personal route into behavioural finance.

Findings

The paper highlights general themes of development and influence of behavioural finance and relationships with practice and other areas of academic finance.

Originality/value

The paper offers the perspectives of the authors on how they feel the research area of behavioural finance will develop in the future.

Details

Review of Behavioral Finance, vol. 12 no. 1
Type: Research Article
ISSN: 1940-5979

Keywords

Available. Open Access. Open Access
Article
Publication date: 14 November 2023

Hajer Chenini and Anis Jarboui

A separate study of the different behavioral biases does not allow for a full understanding of the complexity and stability of the heterogeneity of beliefs. Therefore, through a…

758

Abstract

Purpose

A separate study of the different behavioral biases does not allow for a full understanding of the complexity and stability of the heterogeneity of beliefs. Therefore, through a more global view of these anomalies, the authors wish to show that they can converge on a single concept, which is the heterogeneity of beliefs.

Design/methodology/approach

It is therefore essential to stress that the importance of this study is mainly reflected in the methodological approach used in the construction and analysis of the map and not only in the results achieved. This contribution states that structural analysis, as a means of building the cognitive map, can facilitate the task of investors and other decision-makers, in the identification and analysis of the heterogeneity of beliefs that can therefore guide investors' strategy in decision-making.

Findings

The authors have studied the behavior of the investor and its way of interpreting the information and the authors have emphasized the value of studying the concept of heterogeneity of beliefs in its complexity. So that part of the work seems to be relevant and crucial to filling, if you will, that void. In this sense, the authors have shown that behavioral abnormalities are multidimensional concepts: “self-deception”, “cognitive bias”, “emotional bias” and “social bias”.

Originality/value

In particular, this article will aim to achieve the objective of proposing a model for measuring the heterogeneity of beliefs. Thus, the authors want to show that the heterogeneity of beliefs can be measured directly through the different behavioral anomalies.

Details

Journal of Economics, Finance and Administrative Science, vol. 29 no. 57
Type: Research Article
ISSN: 2077-1886

Keywords

Available. Content available
Article
Publication date: 5 February 2018

William Forbes

447

Abstract

Details

Qualitative Research in Financial Markets, vol. 10 no. 1
Type: Research Article
ISSN: 1755-4179

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Book part
Publication date: 5 February 2019

Les Coleman

Abstract

Details

New Principles of Equity Investment
Type: Book
ISBN: 978-1-78973-063-0

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Article
Publication date: 22 May 2007

Kath Hall

This article aims to discuss some of the most common ways in which business decisions are affected by cognitive biases. It focuses on the individual level of decision making and…

2409

Abstract

Purpose

This article aims to discuss some of the most common ways in which business decisions are affected by cognitive biases. It focuses on the individual level of decision making and discusses how biases are deeply entrenched in the way that many decisions are made. It also discusses how flaws in decision making can escalate when executives are under pressure, over‐confident or part of a group.

Design/methodology/approach

This article draws on a range of research in cognitive and organizational psychology to show the potential effect of cognitive biases on corporate decision making.

Findings

The article argues that it is necessary to develop a better understanding of the effect of cognitive biases on executive decision making. Whilst research suggests that many aspects of decision‐making processes operate outside one's conscious awareness, it is suggested that these flaws may be easier to monitor and control when one is aware of their potential impact on corporate decisions.

Originality/value

The paper demonstrates how a lack of awareness of the widespread operation of cognitive biases reduces the possibilities for good corporate governance.

Details

Managerial Law, vol. 49 no. 3
Type: Research Article
ISSN: 0309-0558

Keywords

Available. Content available
Book part
Publication date: 12 February 2018

Jerry Toomer, Craig Caldwell, Steve Weitzenkorn and Chelsea Clark

Free Access. Free Access

Abstract

Details

The Catalyst Effect
Type: Book
ISBN: 978-1-78743-551-3

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Article
Publication date: 30 August 2023

Sneha Badola, Aditya Kumar Sahu and Amit Adlakha

This study aims to systematically review various behavioral biases that impact an investor’s decision-making process. The prime objective of this paper is to thematically explore…

1321

Abstract

Purpose

This study aims to systematically review various behavioral biases that impact an investor’s decision-making process. The prime objective of this paper is to thematically explore the behavioral bias literature and propose a comprehensive framework that can elucidate a more reasonable explanation of changes in financial markets and investors’ behavior.

Design/methodology/approach

Systematic literature review (SLR) methodology is applied to a portfolio of 71 peer-reviewed articles collected from different electronic databases between 2007 and 2021. Content analysis of the extant literature is performed to identify the research themes and existing gaps in the literature.

Findings

This research identifies publication trends of the behavioral biases literature and uncovers 24 different biases that impact individual investors’ decision-making. Through thematic analysis, an attribute–consequence–impact framework is proposed that explains different biases leading to individual investors’ irrationality. The study further proposes directions for future research by applying the theory–characteristics–context–methodology framework.

Research limitations/implications

The results of this research will help scholars and practitioners in understanding the existence of various behavioral biases and assist them in identifying potential strategies which can evade the negative effects of these biases. The findings will further help the financial service providers to understand these biases and improve the landscape of financial services.

Originality/value

The essence of the current paper is the application of the SLR method on 24 biases in the area of behavioral finance. To the best of the authors’ knowledge, this study is the first attempt of its kind which provides a methodical and comprehensive compilation of both cognitive and emotional behavioral biases that affect the individual investor’s decision-making.

Details

Qualitative Research in Financial Markets, vol. 16 no. 3
Type: Research Article
ISSN: 1755-4179

Keywords

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Article
Publication date: 20 May 2020

Werner De Bondt

Are the capital markets of leading industrialized nations rational and efficient? This powerful hypothesis was badly dented by the work of De Bondt and Thaler (1985) on stock…

1177

Abstract

Purpose

Are the capital markets of leading industrialized nations rational and efficient? This powerful hypothesis was badly dented by the work of De Bondt and Thaler (1985) on stock market overreaction and by subsequent research on momentum and reversals in prices and earnings.

Design/methodology/approach

Human psychology, at times predictably irrational, drives the markets. This paper investigates this issue.

Findings

The author reviews the origins of the idea of overreaction, how behavioral insights modify standard asset pricing theory and how they contribute to our understanding of the world of finance.

Originality/value

The paper reveals the origins of the idea of overreaction, how behavioral insights modify standard asset pricing theory and how they contribute to our understanding of the world of finance.

Details

Review of Behavioral Finance, vol. 12 no. 1
Type: Research Article
ISSN: 1940-5979

Keywords

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