The principal purpose of this paper is to provide a background briefing on behavioural finance (BF) for those unfamiliar with this significant paradigm shift underway in finance scholarship. The paper synthesises and summarises a rapidly burgeoning literature on BF which, presently, is not as accessible as that concerned with modern finance theory. Attention is first given to what is meant by the rationality of financial agents, and the possibility is introduced that financial agents in an uncertain real world may be less than strictly rational. Thereafter, the various heuristics and cognitive biases that may characterise financial decision-making in an uncertain real world are catalogued and explained. The paper finishes with an assessment of the potential for BF to transform scholarship in finance.
Introduction
Rationality of Financial Agents
Heuristics and Cognitive Biases
Discussion and Conclusions
References