Differences between Behavioral Finance and Traditional Finance

The differences between behavioral finance and traditional finance are as follows:

The basic theory is different. The theoretical cornerstone of traditional finance is the hypothesis of investor rationality and market efficiency. According to traditional financial theory, investors are profit-seeking. That is, through arbitrage pricing theory, modern portfolio theory, capital asset pricing model and option pricing theory, we can maximize the income in the capital market.

On the other hand, behavioral finance analyzes the behavior of investors. Behavioral finance thinks? In the process of investment, investors have four kinds of mentality and emotions: overconfidence, pursuing advantages and avoiding disadvantages, pursuing fashion and conformity, reducing regret and shirking responsibility. These decisions are generally characterized by strong adaptability and diversification.

Effectiveness of market competition. Traditional financial theory holds that in the process of market competition, rational investors can always seize the arbitrage opportunity created by irrational investment. Irrational investors lose their wealth in market competition and are eventually eliminated by the market.

Behavioral finance believes that disclosure is insufficient. And the information asymmetry held by rational investors and irrational investors. People are not satisfied with the above assumptions. Therefore, market competition is inefficient. It constitutes another theoretical basis of behavioral finance.

Decision risk is measured in different ways. Traditional finance believes that measuring financial market risk means measuring the value loss of financial assets caused by adverse changes in market factors.

The mainstream method is to describe it through the probability distribution of financial assets. Usually used to measure a certain probability level (confidence)? Under the possible loss degree of Value At Risk? Law.

Do behavioral financiers believe it? Because in practice, investors often don't regard the result greater than the initial capital as risk. The result less than the initial capital is regarded as real risk, so the negative utility brought by the loss is often given greater weight in the utility function of investors. Give less weight to the positive utility brought by income.

Different decision-making modes. What are the main theoretical models of traditional finance? Option pricing model and CAPM? Wait a minute. Behavioral asset pricing model (BAPM) is an extension of modern capital asset pricing model.