ABSTRACT
A pioneer in behavioural finance was the behavioural economist Richard Thaler – who won the Nobel Prize in Economics in 2017. This chapter introduces behavioural finance by focusing on some of the anomalies and related studies. An important point to clarify to prevent confusion is that, whilst behavioural economics and behavioural finance are often treated as separate albeit related disciplines, the distinction between them is largely artificial. Divergences between willingness to pay and willingness to accept have been attributed by some behavioural economists to an endowment effect. The chapter explores how some insights from behavioural economics can be used to explain anomalies in financial decision-making generally – the sort of financial decisions that ordinary people make every day. Thaler and others analyse behavioural financial anomalies using insights from A. Tversky and D. Kahneman’s analysis of heuristics and biases and Kahneman and Tversky’s prospect theory.
