A Survey of Behavioral Finance

Behavioral finance argues that some financial phenomena can plausibly be understood using models in which some agents are not fully rational.The field has two building blocks: limits to arbitrage, which argues that it can be difficult for rational traders to undo the dislocations caused by less rational traders; and psychology, which catalogues the kinds of deviations from full rationality we might expect to see.We discuss these two topics, and then present a number of behavioral finance applications: to the aggregate stock market, to the cross-section of average returns, to individual trading behavior, and to corporate finance.We close by assessing progress in the field and speculating about its future…