Behavioral Finance |

Behavioral Finance

Also available on NUS Webcast.


Political and economic events shake the world. Financial markets gyrate widely in response. Such wild rides should induce substantial new thinking. Old theories, which did not allow for the whipsaws of recent years, deserve severe scrutiny, modification, and potential debunking. Such should be the fate of Efficient Market Theory, a beautiful and admired edifice, but one that simply missed salient developments in the real-world financial markets.

Behavioral finance, a rival theory, starts with the premise that human beings are psychological animals. Even their highly important decisions stray far from what rational theory would prescribe. Behavioral finance – drawing together psychology, economics, and finance – starts by observing the way real individuals make actual decisions affecting their financial futures. It then traces the implications of those decisions to the behaviors of individual assets and financial markets as a whole.

The speaker, who helped to pioneer this field, will identify the most important findings in behavioral finance: (a) Financial markets move much more strongly than traditional theory would predict. (b) Human decisions create such movements. Participants remembering “what happened last time” naively take actions that would have worked then, and new market behaviors emerge. (c) Individuals and institutions – even sophisticated institutions such as government banks and major investment banking houses – engage in herd behavior, often fomenting bad outcomes. (d) Profitable distinctions can be drawn among risk, uncertainty, and ignorance. (e) Behavioral propensities serve to magnify events. The triggering event of the recent financial crisis was a $1 trillion loss in mortgage-backed securities; but $20 trillion was lost in financial markets worldwide. (f) When anxieties are strong, as with financial meltdowns, rational processes shut down.

The discipline of behavioral finance starts with the understanding that major opportunities and dangers lie in unknowable events. Such events will always confront investments and financial markets.

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Prof. Richard Zeckhauser, Frank P. Ramsey Professor of Political Economy, Kennedy School, Harvard University

Thursday, 07 February 2013
5:15 p.m. - 6:30 p.m.

Lobby, Oei Tiong Ham Building,
Lee Kuan Yew School of Public Policy,
469C Bukit Timah Road,
Singapore 259772

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