Behavioral Finance and the Imperative to Rethink Market Efficiency

Abstract

According to traditional finance, investors with rational behaviors examine risk and return before making a decision to obtain maximum profit. However, the exploration of the behavioral path results in deciphering the emotions of participants in the financial markets. The purpose of this work is to examine the role of the psychological theory. The aim is to see how the psychological attractions of actors have been able to acquire a central place in finance, giving rise to behavioral finance, which allows a deeper understanding of investment in the financial markets. This finance is not just a simple presentation of behavioral biases, it aims to use results from cognitive psychology to explain behavioral finance and the imperative to rethink market efficiency. Behavioral biases challenge informational efficiency and can be reflected in prices. Thus, it is a question in this work of explaining behavioral of analyzing how the limit of the efficiency of the financial markets marks the starting point of this approach. This is to highlight its main contribution, which improves decision-making process, and study the factors allowing its integration into the field of finance as an alternative model.