Behavioural Finance

Citation

Power, D. (2010), "Behavioural Finance", Qualitative Research in Financial Markets, Vol. 2 No. 2, pp. 129-130. https://doi.org/10.1108/17554171011053694

The area of Behavioural Finance has been crying out for a textbook such of the one written by William Forbes. It is a growing research area among financial academics, and an important topic for business students. Yet, until now, no one textbook has brought together the models and ideas underpinning behavioural finance into a single tome. The current publication by William Forbes plugs this gap and provides a platform upon which lecturers can structure a course in this area as well as a guide for advanced undergraduate and Masters students on the issues and current findings which are emerging from the growing literature on this topic.

As Forbes points out, the term Behavioural Finance refers to the study of finance based on “credible assumptions about how people behave” and often drawing on findings from psychology. Yet in standard finance textbooks “human drama, the greed, eccentricity or caprice of market participants has been purged”. Thus, the publication of the current book is timely in that it brings together the prior work which recognises the importance of individual behaviour in financial markets as well as financial decisions.

The book has 20 chapters which are grouped together into four sections: foundations, asset pricing, corporate finance and the professions. Each section has chapters which present a model of the issue being analysed (e.g. Noise Traders within asset pricing) together with empirical evidence and case studies (e.g. The AOL – Time Warner merger as an example of hubris). The models are derived in a fairly straight forward fashion and the implications illustrated with numerical examples. The relevant literature is then analysed within the context of the model that has been outlined and supportive as well as contradictory findings highlighted.

The book therefore brings together a lot of different behavioural and financial issues which until now have been considered separately in various academic articles. The issues are treated in a rigorous fashion which should help dispel the myth that the behavioural finance lacks the coherent framework which exists within standard finance texts. Further, the issues are linked to real life cases (such as the Crash in 1987, Michael Eisner and Disney Corporation, Jim Clark and Netscape) in order to highlight how a behavioural analysis can shed light on issues which standard financial analysis tends to ignore.

While some of the model derivations might put undergraduate students off this text, these derivations are not essential; the analysis of the different models' conclusions can be focussed upon and the implications considered. Overall, as Werner De Bundt points out on the back cover of this book Behavioural Finance is Still a Young Field, and William Forbes' textbook marks an important milestone on this fields' progress towards maturity.