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Asset price formation and behavioral biases

Todd Feldman (Department of Finance, San Francisco State University, San Francisco, California, USA)
Gabriele Lepori (Keele University, Keele, UK)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 14 November 2016




The purpose of this paper is to examine the debate on whether psychology affects asset prices using agent-based modeling.


The authors set up three simulation regimes where the first regime contains fundamental investors who invest based on the mean-variance framework. The second regime includes purely irrational investors who invest based on behavioral biases. The third regime combines the two types of investors. The authors test whether the return properties from regime 3 converge to that of regime 1 or 2.


Results suggest that the type of irrationality affects return properties in different ways. Irrational investors who are introspective in their irrationality, only examining their performance and deficiencies, do not have much of a systematic effect on stock returns when combined with rational investors. However, irrational investors that aggregate information in an irrational manner have a systematic effect when combined with rational investors.

Research limitations/implications

Research implication of using simulation analysis is that the results need to be verified via other methods such as empirical and/or experimental analysis.

Practical implications

Practical implications of the research is that policy makers can look for factors that investors use to aggregate to better understand the movement of financial prices and ignore other factors.

Social implications

Social implication is that mass psychology impacts financial prices.


No other paper has used agent-based/behavioral analysis to better understand how different types of behavior may impact financial prices in different ways.



Feldman, T. and Lepori, G. (2016), "Asset price formation and behavioral biases", Review of Behavioral Finance, Vol. 8 No. 2, pp. 137-155.



Emerald Group Publishing Limited

Copyright © 2016, Emerald Group Publishing Limited

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