Knowledge Tree
Traditional finance
Also known as: Traditional finance, Standard finance
Facts (10)
Sources
Understanding Behavioral Aspects of Financial Planning and Investing financialplanningassociation.org Mar 1, 2015 8 facts
claimBehavioral finance incorporates psychology-based theories to explain market inefficiencies and anomalies that contradict traditional finance models like the efficient market hypothesis and the capital asset pricing model.
referenceRobert Bloomfield's chapter 'Traditional Versus Behavioral Finance' in the book 'Behavioral Finance—Investors, Corporations, and Markets' (2010) compares the frameworks of traditional and behavioral finance.
claimTraditional finance theorists initially rejected behavioral finance because they viewed the paradigm as too complex and incapable of refutation.
referenceLucy F. Ackert's chapter 'Traditional and Behavioral Finance' in the book 'Investor Behavior—The Psychology of Financial Planning and Investing' (2014) provides an overview of traditional and behavioral finance.
referenceVictor Ricciardi's chapter 'Risk: Traditional Finance versus Behavioral Finance' in 'The Handbook of Finance, Volume 3: Valuation, Financial Modeling, and Quantitative Tools' (2008) compares how traditional and behavioral finance define and approach risk.
referenceBloomfield (2010) and Ackert (2014) provide a detailed discussion of traditional and behavioral finance.
referenceTraditional finance assumes that market participants, institutions, and markets are rational, make unbiased decisions, and maximize their self-interests.
claimThe efficient market hypothesis (EMH) and the capital asset pricing model (CAPM) are classic theories of standard finance based on the assumption of rational market participants.
The Impact of Cognitive Biases on Professionals' Decision-Making frontiersin.org 2 facts
claimStandard finance relies on expected utility theory, which assumes that investors make rational decisions under uncertainty by maximizing utility.
claimStandard finance includes core theoretical concepts such as arbitrage, portfolio theory, capital asset pricing theory, and the efficient market hypothesis, all of which assume rational investors.