Behavioral finance looks at how our feelings and thoughts affect how we invest money. This can change how much things cost. Here are some important ideas:
Overreaction: Research shows that investors can sometimes get really excited or worried. This can lead to stock prices moving too much. In fact, up to 23% of price changes might just be because of this overreaction.
Underreaction: Sometimes, investors don’t react quickly enough to news about a company's earnings. This slow reaction can change how much money they make by an average of 2.7%.
These strange behaviors make it hard for traditional finance methods, like the Capital Asset Pricing Model (CAPM), to explain what we see in the market.
In CAPM, expected returns (how much money we think we will make) are shown with this formula:
E(R) = R_f + β(E(R_m) - R_f)
In this formula:
Overall, behavioral finance teaches us that our emotions play a big part in money decisions!
Behavioral finance looks at how our feelings and thoughts affect how we invest money. This can change how much things cost. Here are some important ideas:
Overreaction: Research shows that investors can sometimes get really excited or worried. This can lead to stock prices moving too much. In fact, up to 23% of price changes might just be because of this overreaction.
Underreaction: Sometimes, investors don’t react quickly enough to news about a company's earnings. This slow reaction can change how much money they make by an average of 2.7%.
These strange behaviors make it hard for traditional finance methods, like the Capital Asset Pricing Model (CAPM), to explain what we see in the market.
In CAPM, expected returns (how much money we think we will make) are shown with this formula:
E(R) = R_f + β(E(R_m) - R_f)
In this formula:
Overall, behavioral finance teaches us that our emotions play a big part in money decisions!