Behavioral finance has been kicking around the halls of academia for several decades, but now some financial companies are finding ways to apply these concepts in the real world.
Image by www.dld-conference.com via CrunchBaseSome experts scoff at the notion that behavioral finance is too esoteric to be useful. "I've heard this idea a lot, and I think it's funny," says Duke University Professor of Behavioral Economics Dan Ariely, one of the main proselytizers of behavioral finance. He says people naturally use the ideas behind behavioral finance. "Everyone uses psychology, even if they pretend they don't," he says. "Investors naturally think that they know more than other investors," he says, invoking one of the ideas that behavioral science warns about-overconfidence. Ariely even questions whether financial institutions have an incentive to delve into behavioral finance and help clients improve decision-making. He maintains that they benefit from opaqueness in the market because it helps them convince clients of the value they add.
Image via WikipediaRegardless of its application, behavioral finance has been kicking around the halls of academia for a couple of decades. Herbert Simon, a professor of computer science and psychology at Carnegie Mellon, won a Nobel Prize in Economics in 1978 for his work in decision making. But it wasn't until psychologist Daniel Kahneman won the Nobel in Economics in 2000 that these ideas really began to gain traction.
Image via Wikipedia
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