The Foundations of Behavioral Finance—Learning and Elaborations of the Basic Theories

Abstract

This paper explores the fundamental concept of Behavioral Finance and how it relates to an individual’s decision-making in regard to the balance between risk and return. A literature review was conducted, drawing from academic concepts in books and online resources, as well as data collected from online websites. The aim of this review is to build a foundation of knowledge in the study of Behavioral Finance. The theories discussed include Rational Expectation Theory, Efficient Market Hypothesis, Utility Theory, Prospect Theory, Loss Aversion, Anchoring, Mental Accounting, Framing, and Asymmetric Information. The next step is to analyze and synthesize the information, identifying key concepts and principles of each theory, exploring their implications, and examining their interrelations. Additionally, real-world examples and case studies will be considered to illustrate the application of these theories in practice. The ultimate goal is to develop a nuanced and in-depth understanding of the field of Behavioral Finance, its relevance to individual decision-making, and its impact on financial markets.