Traditional & Behaviour Finance

In traditional theories of finance, investment decisions are based on the assumption that investors act in a rational manner. It means investors collect all necessary information and analyze the investment avenue from all the perspectives and then take decision without being influenced by any other factor. Traditional finance theories also stated that markets are efficient. An efficient market is the one in which the market price of a security is an unbiased
estimate of its intrinsic value.

Modern theory of investor’s decision-making suggests that investors do not act rationally at every time while making an investment decision. They deal with several cognitive and psychological errors. These errors are called behavioral biases which exist in many ways. Efficiency of markets was also challenged by many researchers by arguing that it was impossible for efficient markets to exist since information has a cost associatedwith it and the market prices will not reflect available information. Behavioral finance has been growing specifically over the last twodecades as the difference between assumptions made in traditional finance theory and actual behavior of investors is observed.