Postgraduate Dissertation

Behavioural Finance: Is it important? What do the empirics suggest?


By using the adjective behavioural in the financial sphere, one wishes to refer to the science that took shape in the past twenty years of this century. Behavioural finance studies the influence of individual behaviour traits on decisions-making in the financial field and the effect of these on the market (Sewell, 2010). Undoubtedly, the spotlight on the existence of a variety of psychological factors influencing the process of decision-making has proved to be its most significant contribution to the field of economics and finance. This has clearly forced experts to question whether the individual always acts in a predictable and rational way. Therefore, behavioural finance has the task of explaining how individuals can react to certain events and aim to predict the irrational financial moves that many could possibly make (Hellmann, 2016). The literature on the subject can be distinguished between studies on anomalies within classical market theories (Bondt & Thaler, 1985); and those analysing investor’s behaviours that differs from classical economic theories (Odean, 1999). It can be safely stated that behavioural finance has challenged economic-financial disciplines to review and improve the way they think about efficient markets. Given the increasing complexity of financial markets, such an issue can help investors make decisions on more solid grounds. A striking statement in this context is one by behavioural researchers Barberis and Thaler (2003) at a time when behavioural finance was still coming to light: ‘We have now started with the important job of recording and understanding how investors, both amateurs and professionals, make their decisions while choosing their portfolio. Until recently such researchers were absent from the toolbox of financial economists, perhaps due to the misconception that the value of assets can be defined without any knowledge about elements of behavioural economics’. Certainly, there has been criticism about the emerging discipline of behavioural finance too. For instance, the economist Eugene Fama (1997) - an advocate of market efficiency - considered behavioural finance as the search for anomalies rather than a real branch of economics. And these anomalies, referring to prejudices, according to the economist would have to be evaluated outside the context of financial markets. However, the prejudices that the economist underlined were based on social nature and are indeed quite distant from individual prejudices that behavioural finance deals with. The first part of this document outlines the historical background of the discipline and aims to demonstrate the validity of this science. The opening chapter explores schools of thought in favour of behavioural finance, elaborated by Kahneman and Tversky (1979), and the criticism that still today casts doubt on the validity of the discipline, such as the neoclassical one. In addition to this, the study examines some of the most widely used methodologies in terms of analysing behaviours. Throughout the study, a critical examination has been carried out around the comparison of models and methodologies used by various behavioural researchers. Indeed, critical examination of the various models is necessary, in order to understand how behavioural finance implements its studies. It is also useful to comprehend the benefits and disadvantages of these methodologies to be able to critically assess their effectiveness and value. Ultimately, this study focuses on the results obtained by experts’ research with the aim to critically observe them and understand their importance within the field of behavioural studies. The paper's purpose is to focus on providing evidence on the validity and efficiency of the discipline of behavioural finance on the basis of studies conducted by scholars.

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Cicolella, Luca


Rights Holders: Cicolella, Luca

Oxford Brookes departments

Department of Accounting, Finance and Economics

Degree programme

MSc Finance



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