STANDARD FINANCE Vs. BEHAVIORAL FINANCE: A COMPARISON

Behavioral Finance tries to analyse how the decision making process of investors is influenced by their cognitive errors or mental mistakes &emotions. Investors mostly behave irrationally, in a biased manner but the reverse of which is indicated in the quantitative models of traditional finance theories. There exist a psychological influence on the actions of investors while taking financial decisions & its following effect and impact on the share markets. The knowledge of these biases facilitates the investors in recognizing their own mistakes in order to ensure that such mistakes are not committed henceforth but the Standard financial theories have always been the backbone of traditional finance with the basic assumptions that market is efficient, people are rational and stock & bond markets are efficient. This paper is an attempt to investigates the major differences between standard finance theories and behavioral finance theories.