Assessing the Role of Behavioral Finance in Explaining Investor Irrationality and Market Anomalies
Posted: Jun 06, 2023
Abstract
The persistent failure of traditional financial theories to adequately explain market anomalies and investor behavior has prompted a paradigm shift toward behavioral finance as a more comprehensive explanatory framework. Traditional finance, rooted in the efficient market hypothesis and rational expectations theory, has consistently struggled to account for phenomena such as momentum effects, value premiums, and excessive volatility in asset prices. Behavioral finance emerged as an interdisciplinary approach that integrates psychological insights with economic theory to better understand how cognitive biases and emotional factors influence financial decision-making. This research addresses a critical gap in the literature by developing and empirically testing a comprehensive model that quantifies the relative contribution of behavioral factors to investor irrationality across diverse market conditions.
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