Behavioral finance is the paradigm where financial markets are studied using models that drop the tow basic and limitative assumptions -expected utility maximization and full rationality- of traditional paradigm. Behavioral finance has tow building blocks:
limits to arbitrage, which argues that it can be difficult for rational investors to exploit arbitrage opportunity, because this action requires accepting some risk; and psychology, which surveys investors’ behavior and judgment as well as errors made by people when they judge. In this paper, after reviewing the tow building blocks of behavioral finance, we mention some applications of behavioral finance.
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