Behavioral Finance And Its Application Study

The traditional finance theory is based on EMH and CAPM, but the models and methods are confined to the frame of rationality ignoring the analysis of investor's actual decision behaviour. With the accumulation of abnormal phenomena in the financial market, the deviation between the results of model and the reality make it awkward and unreasonable. Under this environment behavioral finance rose quietly in the 20th century and vibrated the authoritative status of EMH and CAPM.Behavioral finance builds its own theory on the two hypotheses: cognitive biases and limited arbitrage in order to study human's economic decision relaxing the rationality hypothesis. Its emphasis on the individual and colony's behavior make it possible that financial theory and reality can be integrated. Based on the theory of behavioral finance this article studies the application of behavioral finance. This article centers on the psychology foundation of behavior finance, prospect theory, asset combination and pricing model. From the angle of macroeconomics, this article centers on the efficiency of security market bringing forward the viewpoint of inefficient market and applying the behavioral finance to analyze the abnormal phenomena of security market, which cannot be explained with the traditional finance theory. Behavioral finance develops on the basis of querying on EMH. It put forward the assumption about the human behavior: incomplete rationality. From the angle of microeconomics this article centers on three questions: individual finance, corporate finance and game theory. Investor's irrational behavior causes the departure of price from its own fundamental value, which can be the source for some investor to make money. As for corporate finance, this article centers on the agent problem and investing-financing decision-making. Personal cognitive may invalidate the perfect incentive mechanism, and the investor's cognitive biases may influence the investing-financing decision-making. Standard game is the rational human's game, but now it is different. With the development of experimental economics and the establishment of irrationality, standard game and behavioral finance integrate relaxing the hypothesis of player's rationality, which results in new behavioral equilibrium.