A Survey of Behavioral Finance
Read the paperopens www.nber.org in a new tab
What they found
The standard survey of behavioral finance's first two decades. The authors organize the field around two pillars: limits to arbitrage (why smart money cannot always correct mispricing, because of noise-trader risk, implementation costs, and fundamental risk) and psychology (beliefs such as overconfidence, representativeness, conservatism, and anchoring, and preferences such as prospect theory and ambiguity aversion). They then walk through applications: the equity premium, excess volatility, the closed-end fund puzzle, cross-sectional anomalies, individual investor behavior, and corporate finance.
What you can use
- Mispricing persists not because nobody notices but because correcting it is risky and costly; that is why behavioral edges do not vanish instantly.
- The two pillars, limits to arbitrage and psychology, are both required: biases alone would be arbitraged away.
- A single reference for how each psychological bias connects to a specific market anomaly.
Caveats
Survey written in 2002; the field has grown considerably since, and some cited anomalies have weakened. Long and dense in places.
Tags: behavioral, survey, limits-to-arbitrage, psychology
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.