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Free «Behavior Finance» Essay Sample

Behavioral finance is a study which uses the common cognitive and emotional factors in comprehending the day to day decisions made in the economics field. However, these decisions are actually made by organizations and persons concerned with the economic activities which include shareholders, borrowers and clients and their influence on market values. In the same line of thought, the classical financial theory makes a lot of assumptions which are not realistic in the market place (Parikh, 2009).

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Therefore, when the writer says that some assumptions made by the theory are dangerously at odds with what happens in financial markets, he is basically saying that these assumptions are not applicable in the real market environment. In fact, the writer is of the idea that the most vital law of similar price is normally not taken into consideration. Actually, it is frequently ignored while dealing with equity, bonds and exchange markets. This is to say that this law is not observed at all. As a matter of fact, returns in equity markets are not dispersed at all as per the assumption of the classical theory (Shefrin, 2002). Needless to say, in the stock market the one price law is not observed since the brokers can negotiate for a lower price especially for small investors. On the other hand, there is lack of price intelligibility in the bond markets.

In reality, I do agree with the second quote. This is because irrational market participants are the best risk takers since they do not put a lot of conditions in their decisions. For this reason, they may end up getting good returns in their investments as compared to the rational participants. Actually, most of the clients in gambling games are irrational participants and at times they get good fortunes out of it even though they risk a lot with the expectation of getting little. Consequently, it is possible for irrational market participants under some special circumstances to dominate the market place.

   

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