Behavioral finance is a model studying financial markets including construction blocks including cognitive psychology and arbitrage limitations. Cognitive psychology involves people making strategic mistakes in their way of thinking. The emphasis on their preference and their focus on recent experiences creates problems in their thought process. Behavioral finance avoids the distorted thinking and takes only reasonable ideas into consideration. Arbitrage limitations involves forecasting situations in which arbitrage forces is efficient and the opposite (Filbeck et. Al, 2017). Behavioral finance utilizes structures in which sources are irrational due to preferences or due to wrong ideas. The advanced finance has Efficient Markets Hypothesis (EMH) that states fight between investors asking for unusual revenues drive amounts to their accurate amount. The EMH estimate markets to be rational rather than investors being rational. Behavioral finance assume that financial markets have insufficient data (Dhami, 2016).

Behavioral finance has been building knowledge from a social science aspect into studying financial economics. The behavioral finance has brought together reality and authority to construct rational sources and capital market efficiency. The current progress on DNA analysis in cognitive psychology has made possibilities to evaluate the relation between genetic diversification and unique behaviors. De Neve and Fowler obtain a relationship between use of credit card and monoamine and oxidase A (MAOA) gene (De Neve and Fowler, 2014). Other authors conduct a research on if people have less savings while observing consumption of other people. The proof of under saving is found in the adjustment allowing inter-personal differentiations and come to a conclusion on this behavior driven by various subjects. Other authors also use data to observe people retain high-cost customer debt and low-yield liquid assets. It is a conclusion of deficient self-control and financial illiteracy that drives this attitude. Other authors research on experiment that shows changes in decision environment can impact firm behavior. Investigation on impact of state-level procedure that changed status quo for the US home loan providing organizations changed firm’s behavior and led to modification of loan and completing closures.

Along with financial decision making and market dynamics, other fields of research used different information and procedures in financial research. Well-informed experts study duties in lateral thinking and judgment biases and decision making depend on varied lateral thinking while expressing views on future profession. Risk taking perspective also falls under DNA analysis and financial behavior. (Roth and Voskort, 2014) evaluate the accuracy with which the financial advisors measure risk preference of advisees. They not only depend on target self-assessments but also on stereotyping and their risk preference. Other authors research on the way prepayment impacts financial decisions in a riskless aspect. Thus, the research launches a new side on the way risk is dealt at an institutional level and the skills institutions should implement.

Thus, to conclude the article gives a summary of beliefs of changes taking place. It gives a brief about the way different authors consider behavioral finance. The article gives a view of studying DNA and more advanced topics considered to study behavioral finance practices at present.

References

De Neve, J. E., & Fowler, J. H. (2014). Credit card borrowing and the monoamine oxidase A (MAOA) gene. Journal of Economic Behavior & Organization, 107, 428-439.

Dhami, S. (2016). The foundations of behavioral economic analysis. Oxford University Press.

Filbeck, G., Ricciardi, V., Evensky, H. R., Fan, S. Z., Holzhauer, H. M., & Spieler, A. (2017). Behavioral finance: A panel discussion. Journal of Behavioral and Experimental Finance, 15, 52-58.

Roth, B., & Voskort, A. (2014). Stereotypes and false consensus: How financial professionals predict risk preferences. Journal of Economic Behavior & Organization, 107, 553-565.