BEHAVIORAL FINANCE: THEORETICAL BACKGROUND AND EMPIRICAL EVIDENCE

Abstract

The purpose of this paper is to provide insights into achievements of scientific studies in various fields which have been reflected in modern finance, particularly in behavioral finance, as well as to consider some patterns of individual behavior which influence the effectiveness of investments in the financial market. The paper is based on the review of the existing theoretical in different fields of study. The necessity of studying behavioral finance as an important direction of modern financial science is considered. The main theories from different fields of studies which influence the formation of behavioral finance as a scientific direction are highlighted. The empirical evidence of some aspects of the irrational behavior and its influence on the effectiveness of the financial processes. The findings are likely to be useful for practitioners and researchers to gain knowledge about the background of behavioral finance. From a practical point of view, the possibility of synthesizing various approaches to people's behavior allows us to use the obtained results in building more efficient processes in the financial environment. The paper contributes to the discussion about the rational and irrational behavior and its influence on the processes in finance.

Keywords

• behavioral finance
• irrational behavior
• Crowd effect
• Allais paradox
• Ellsberg paradox
• prospect theory