This paper explores the fundamental concept of Behavioral Finance and how it relates to an individual’s decision-making in regard to the balance between risk and return. A literature review was conducted, drawing from academic concepts in books and online resources, as well as data collected from online websites. The aim of this review is to build a foundation of knowledge in the study of Behavioral Finance. The theories discussed include Rational Expectation Theory, Efficient Market Hypothesis, Utility Theory, Prospect Theory, Loss Aversion, Anchoring, Mental Accounting, Framing, and Asymmetric Information. The next step is to analyze and synthesize the information, identifying key concepts and principles of each theory, exploring their implications, and examining their interrelations. Additionally, real-world examples and case studies will be considered to illustrate the application of these theories in practice. The ultimate goal is to develop a nuanced and in-depth understanding of the field of Behavioral Finance, its relevance to individual decision-making, and its impact on financial markets.
References
[1]
Ye, S.Q. and Peng, Y. (2007) The Relation between Risk and Return of Portfolio Based on Standard Finance and Behavioral Finance. 2007 IEEE International Conference on Control and Automation, Guangzhou, 30 May 2007-1 June 2007, 518-522. https://doi.org/10.1109/ICCA.2007.4376410
[2]
Sembieva, L. and Ismailova, A. (2022) Relevance of Budget Investment and Definition of Its Concept. Herald of Economics, 4, 69-86. https://doi.org/10.35774/visnyk2021.04.057
[3]
Elise, E. and Daryanto, W.M. (2018) The Effect of Depreciation Methods on the Profitability and Net Present Value (NPV): A Case Study of Nam Con Son 2 Phase Pipeline Project, Vietnam for the Period of 2019-2037. South East Asia Journal of Contemporary Business, Economics and Law, 17, 8-12.
[4]
Patel, S., Krishnan, B. and Meziani, J. (2002) Addressing Risks in Hedge Fund Investments. The Journal of Retirement Fall, 2002, 89-97.
[5]
Fama, E.F. (1970) Efficient Capital Markets: A Review of Theory and Empirical Work. The Journal of Finance, 25, 383-417. https://doi.org/10.2307/2325486
[6]
Malkiel, B.G. (2003) The Efficient Market Hypothesis and Its Critics. Journal of Economic Perspectives, 17, 59-82. https://doi.org/10.1257/089533003321164958
[7]
Grossman, S.J. and Stiglitz, J.E. (1980) On the Impossibility of Informationally Efficient Markets. The American Economic Review, 70, 393-408.
[8]
Kahneman, D. and Tversky, A. (1979) Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47, 263-292. https://doi.org/10.2307/1914185
[9]
Kahneman, D. and Tversky, A. (1979) Prospect Theory: An Analysis of Decision under Risk. https://web.mit.edu/curhan/www/docs/Articles/15341_Readings/Behavioral_Decision_Theory/Kahneman_Tversky_1979_Prospect_theory.pdf
[10]
Huachen, W. (2013) Behavioral Finance and the Dynamic Adjustment of Capital Structure: A Loss Aversion Perspective. Finance & Trade Economics.
[11]
di Toro, M. (2022) Asymmetric Volatility Bias and Loss Aversion in Investment Decision-Making. International Journal of Research and Review, 9, 476-481. https://doi.org/10.52403/ijrr.20221054
[12]
Weber, M. and Camerer, C.F. (2011) The Disposition Effect Revisited: Psychological Mechanisms of Market Inefficiencies. Journal of Economic Behavior & Organization, 77, 20-36.
[13]
Li, Z. (2021) The Gender Psychology of Mental Accounting Financial Decision Making. 2021 5th International Conference on Business and Information Management, Guangzhou, 26-28 August 2021, 62-68. https://doi.org/10.1145/3483794.3483804
[14]
Hamzah, A. (2022) Pengaruh Overconfidence Bias, Mental Accounting Dan Familiarity Bias Terhadap Pengambilan Keputusan Investasi. Journal of Global Business and Management Review, 4, 50-65. https://doi.org/10.37253/jgbmr.v4i1.6777
[15]
Dewi, M., Hamidah, H. and Buchdadi, A.D. (2021) The Influence of Financial Literacy, Experienced Regret, Framing Effect and Mental Accounting on Millennial Generation Investment Decisions in DKI Jakarta with Risk Tolerance as Intervening Variables. International Journal on Advanced Science, Education, and Religion, 4, 147-163. https://doi.org/10.33648/ijoaser.v4i3.155
[16]
Kulkarni, K. (2021) Asymmetric Information and Its Behavioural Impact on Investors: A Review. Journal of Emerging Technologies and Innovative Research, 8, d862-d866.
