Psychology of investors: reexamination of the traditional finance

Abstract

Traditional finance and behavioral finance are two branches of finance, dealing differently with the decision-making choices of stock brokers, whether on the financial markets or in the company of which they are shareholders. The traditional approach is based on the hypothesis of the efficiency of financial markets and the perfect rationality of the stock market, on the other hand, the behavioral one takes into consideration the impact of cognitive bias and emotional bias on the decision-making process. Rationality and irrationality are two explainable concepts of the decision-making of the drone operators. According to the traditional, stock brokers are “rational” since they allow the price of a share to be linked with its fundamental value and the cancellation of any divergence through arbitration. However, behaviorists describe drone operators as “irrational” because they are humans, driven by emotions and judgment heuristics that interfere with their rational behavior and investment decisions. The purpose of this article is first to clarify the basic foundations of each reasoning, so that we can know whether behavioral finance actually offers remedies for a good understanding of the behaviors of drones.