ECON350 Lecture Notes - Lecture 12: Behavioral Economics, Efficient-Market Hypothesis, Dividend Policy
Document Summary
Contents: what is behavioural finance, how and why it began, behavioural theories: heuristics and prospect theory. Orthodox finance theory is based on a representative agent that is a rational utility (cid:858)(cid:373)a(cid:454)i(cid:373)iser(cid:859) (cid:449)ho (cid:373)akes u(cid:374)(cid:271)iased fore(cid:272)asts a(cid:271)out the future. Bf expands the attributes allowed for this representative, replacing the (cid:858)rational(cid:859) agent with a (cid:858)normal(cid:859) person who is susceptible to a range of cognitive illusions. Finance is not born by itself, belonging to nature, human factor, incorporate the behavior and emotion. How and why it began: the idea that psychological factors may play a role in financial markets is hardly a new one. Financial markets participants, as opposed to many theorists, have always known that less than rational behaviour has been a dominating feature of markets. The dividend policy of a firm should be completely irrelevant to its share price. For example, if a firm pays a large dividend then its retained earnings fall.
