HOW PSYCHOLOGY AFFECTS DECISIONS IN CORPORATE FINANCE: TRADITIONAL VS. BEHAVIOURAL APPROACHDownload This Article
The aim of this research is to draw a theoretical line to connect on a common conceptual base, behavioural fi-nance with what is internationally known as Modern Fi-nance. The debate often involves discussions about the prevalence of rationality over irrationality. This paper will address mainly two questions: as an economist, should I propend for traditional or for behavioural finance? And, perhaps more important, are they in opposition to each other? Linking the principles upon which the traditional theory of finance is based to behavioural finance appears also to be useful to better understand recent global turmoil in the world financial system. In finding such links, behavioural finance studies will help on driving research to define market models much closer to reality than they are today. Thus literature recognition will be carried out, starting from the most important contribution to fundamental analysis, value theory, going through modern portfolio theory and efficient market hypothesis to seminal contributions on behavioural finance, reaching recent findings of Neuronomics, in order to establish some common theoretical base in corporate finance studies.
Keywords: Behavioral Finance, Rationality, Efficient Markets, Cognitive Biases, Heuristics
How to cite this paper: Piras, L. (2012). How psychology affects decisions in corporate finance: Traditional vs. behavioural approach. Journal of Governance and Regulation, 1(4), 76-87. https://doi.org/10.22495/jgr_v1_i4_p6