Journal of Economic Psychology 25 (2004) 373–405
Behavioral finance and asset prices:
Where do we stand? q
European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany
Received 16 March 2002; received in revised form 23 October 2002; accepted 15 April 2003
This paper contains a survey of the anomalies identified in the behavioral finance literature,
with a particular focus on those which might affect market prices. The anomalies are grouped
in five categories, namely (i) decision heuristics, (ii) emotional and visceral factors, (iii) choice
bracketing, (iv) unknown preferences, and (v) reference dependence. These anomalies are dis-
cussed against the background of the assumptions normally maintained in the standard ap-
proach based on expected utility maximization, in order to highlight the difference between
the mainstream and the behavioral finance approaches.
2003 Elsevier B.V. All rights reserved.
PsycINFO classification: 3000; 3920
JEL classification: G12; G14
Keywords: Behavioral finance; Anomalies; Market prices; Rationality
A conventional valuation which is established as the outcome of the mass
psychology of a large number of ignorant individuals is liable to change
violently as a result of the sudden fluctuation of opinion due to factors
which do not really make much difference to the prospective yield; since
there will be no strong roots of conviction to hold it steady.
Keynes (1936, Chapter 12, p. 154)
e views expressed in this paper are only those of the author and are not necessarily shared by the
ean Central Bank.
ail address: firstname.lastname@example.org (L. Stracca).
870/$ - see front matter 2003 Elsevier B.V. All rights reserved.
L. Stracca / Journal of Economic Psychology 25 (2004) 373–405
Speculative excesses, referred to concisely as a mania, and revulsion from
such excess in the form of a crisis, crash, or panic can be shown to be, if
not inevitable, at least