Article by Ms Eleni Kariofyllis

Those who attend or attend lectures in finance will know that the finance industry can take a variety of approaches depending on the education usually given to each university and the interpretation of results and financial disturbances may be very different from economist to economist. Indicatively, over the centuries, the following theories have been recorded: Classical Economics (1720-1880) with main supporters Marx, Ricardo, Mill , then neoclassical theory (1880-1928) with representatives Marshall, Pareto , Samiulson, etc. , then appear the Keynesians with Keynes      and Fisher (1929-1940), then subdivided into subfields (1941-1970) thereby developing theories of growth and development, international trade, game theory. The 1970s and 1980s show the behavioral economics that I will analyze in this research. In the following years until today, when complex systems dominate, there has been an evolution of previous theories depending on the developments of each period and the creation of new ones.

A Brief Historical Review of Behavioral Economics

Since the classical period, microeconomics has been closely linked to psychology. Specifically, Adam Smith wrote the book The Theory of Moral Emotions , in which he proposed psychological explanations of individual behavior . Many economists have since tried to reform the science of finance as a natural science , drawing on assumptions about economic behavior from assumptions about the nature of economic individuals . Thus, they developed the concept of ‘ Homo Economicus ‘, whose psychology was essentially rational. However , many important neoclassical economists have used more sophisticated psychological explanations, including the Francis Edgeworth , Vilfredo Pareto , Irving Fisher and John Maynard Keynes . The economic sentiment appeared in the 20th century in the works of Gabriel Tarde , George Katona and Laszlo Garai . In the 1960s, cognitive psychology began to shed more light on the brain as an information processing device (unlike behavioral meters models ). Psychologists in the field that, like Ward Edwards , Amos Trevsky and Daniel Kahneman (Nobel Prize for Economics in 2002 for behavioral ) began to compare their models for cognitive decision making under risk and uncertainty in the financial m models of rational behavior . In m athimatiki psychology, there is one with a long-standing interest in m etavatikotita of preferences and the type of scale with measurement of utility ( Luce , 2000).

Especially in the current economic crisis, the worst since the Great Depression, shook to its foundations the financial world , as proved theories and models that considered buying firm does not apply, and was the occasion for a reassessment of the function of both the financial markets and the how people make their financial and investment decisions. According to B. Eichengreen , the great credit crisis has cast doubt on everything we thought we knew about finances .

One of the dominant theories taught in most universities to date is the theory of rationality , where people act as individuals and as members of interest groups, in all their energies, at whatever level they operate rationally, always seeking the best possible solution, one that brings them the maximum possible benefit. Every social benefit arises as a result of individual decisions and actions to the satisfaction of individual individual interests. Classical liberals and utilitarians espouse the view of the fundamental anthropological assumption of the incomplete nature of man and conclude that society can only be built on terms of rational behavior. The truth is that it has dominated for the simple reason that it greatly simplifies economic analysis while enabling the quantification of findings.

Some economists, however, found this notion of rationality unreasonable and thus attempted to explain some unorthodox actions through psychology. Thus created the behavioral economics ( behavioural economics ), a relatively new discipline that studies the cognitive, social and emotional influences on people’s behavior, particularly their economic behavior, and generally what leads to decisions. However, the development led to the expansion of the application and interpretation of various financial statements by developing sectors such as financial behavioral ( financial economics ), triggers ( nudges ) and neuroeconomics .

To make these more understandable let’s take a look at some terms.

The Behavioral financial tries to explain phenomena of human behavior observed in chrimatoikonomikes markets, which can not be explained by the theory of efficient market [1] that is, based on the rational investor hypothesis and the classic utility maximization models. Decision-making research shows that most investors behave relatively unorthodox. Feelings like fear, greed, uncertainty and competitiveness do not allow them to make sensible decisions. in times of uncertainty.

Some cases where the inefficiencies of markets are evident are :

Calendar dates ( January or December effect ): In particular, the phenomenon observed is the return on equity is usually negative in December and positive in January, making it possible to achieve one thus how supranormal returns. One explanation is that some investors, particularly firms operating with shares , sell m shares D ekemvrio to experience capital losses and thus with reduced its tax burden and January regain the positions they had before, leading the prices to rise.

Weekend-Monday phenomenon: Compared to the rest of the week, money market returns tend to be higher on Fridays and lower on Mondays. Interpretations of this phenomenon were based on the fact that bad news is usually announced at the weekend so that they can be assimilated smoothly on the market while others are attributed to the New York Stock Exchange clearing practices.

Sunny Day: It has been generally observed that sunny days are positively related to stock returns. The general investor sentiment, which is obviously influenced by the presence of sunshine, seems to be positively correlated with market returns.

The size of the company is consistent with the tendency in the markets for small-cap companies’ returns to exceed, on average, the returns of high-cap companies in the long run.

The phenomenon of winners and losers ( contrarian strategy ): anyone investing in low historical yield stocks ( losers ), can achieve significantly better returns than investing in shares with historically higher returns ( winners ) .The Their strategy is to invest in contrast to the majority of investors.

The momentum : The phenomenon Momentum coincides with the trend of stock prices to grow more when they are on the rise and fall more when already progressively decrease.

The differences between the two are that in the first place investors look for financial securities where they look intimidated by other investors. The main risk they take is that they distort the prospects of an investment and financial security has more losses than profits. On the other hand, modem investors, the biggest risk they have is that they take a position too late because the prospect of a title is already apparent. In this case, instead of continuing with the rise in the price of the security and moving in the opposite direction, it leaves the investor with a loss, in short they are looking for financial bubbles.

The Riddle of Prix m Share ( Equity Premium Puzzle ). According to the theory of an efficient market, the greater the risk an investment has, the higher the yield should be. If this is the case, then the puzzle begs the question of why investors choose low- risk or zero- return investments instead of investing in equities that will give them higher returns given their uncertainty.

Possible explanations of the puzzle are: statistical illusion ( statistical illusion ), high risk aversion ( high risk aversion ), market imperfections ( market imperfections ), theory of perspective ( prospect theory ), myopic loss aversion ( myopic loss aversion ), ( that is, investors value their portfolio in a rather myopic way in the short term, so they are extremely vulnerable to losses and require higher compensation to invest in equities).

Riddle of Dividends ( Dividend puzzle ): Riddle of the dividends is the irrational behavior of investors to prefer companies that pay dividends rather than reinvest the profits themselves. They should normally be indifferent as to whether they will receive profits in the form of dividends or increased value of the business as a result of the reinvestment.

In an effective market, the value of the business should not be affected either by how the business is financed or by its dividend policy. On the contrary, many studies find that investors reward dividend-paying companies.

To refer to something closer and universally accepted , the following are listed:

Brokerage crises: A stock market crisis is characterized by a sharp decline in asset prices, and in particular in equities, followed by the deterioration of all or most of the financial ratios, the bankruptcy of businesses and the failure of financial institutions.

Stock Bubbles : A stock market bubble is a situation in which the market value of a security continually exceeds its intrinsic value until this situation expands (the bubble breaks) and results in a sharp and rapid decline in prices.

Brokerage Fashions: Brokerage fashions are a special case of a stock market bubble, where the departure from the fundamental price of a stock is the result of some psychological and social forces that create fashion as up or down trends in stock prices.

Beliefs are an important component of any model that studies money markets as they determine how investors shape their expectations. The psychological factors that influence the decision-making process and which are based on beliefs are described below.

  • Overconfidence
  • Overreaction – Underreaction
  • Conservatism
  • Representativeness
  • Attachment – anchoring
  • Availability bias
  • The gambler’s mistake
  • Unfair behavior
  • Optimism, positive thinking
  • Adherence to beliefs


The theory of perspective ( Prospect theory ) delivered by Kahnem and Tversky, stipulates that investors appreciate the gains and losses differently, taking their decisions based more on perceived earnings than in the perceived damage that would result from a situation.

Therefore, if one is given the opportunity to choose between two possibilities with equal probability of being realized, one expressed in terms of potential profit and the other expressed in terms of probable loss, the person will choose the first. Simply put, if there is no difference between actual profits or losses from a particular product, investors will theoretically choose this product that offers the most perceived profits.

Prospect theory also argues that investors evaluate their investments on the basis of the profit or loss they make and not on the basis of the amount they receive or pay from their sale or purchase respectively.


Investors tend to prefer to win 100 € from a bet with a 50-50 chance of winning 200 € or 0 €. On the contrary, however, they tend to prefer a bet with a 50-50 chance of losing 200 € or 0 € rather than suffering a certain loss of 100 €

The perspective theory outlined above is directly related to the following definition, as it is common sense to change the way that choices are presented and their influence on decision making.

The theory Nudge (the theory of impulse) is the analysis, improvement and design or re-design influences the way people thought and decision subconsciously decisions according to how these people get real decisions (on the order instinctively) , and not according to how leaders and other policymakers tend to believe that people make decisions – that is, logically and obediently.

The sectors that can be applied are varied, such as public policy, in cooperation with government agencies. Effective nudges have been implemented to reduce tax evasion, the economic use of energy in households, and in a variety of social problems. It is aimed at organizations and companies with a view to finding alternatives to the intra-company issues that may arise.


The impulses have also been firmly established in the field of advertising, with a progressive air about the evolution of marketing. Some examples that anyone can identify are:

  1. The majority of people can do no wrong

On various social sites, either online shopping or social networking sites, it is customary to indicate the number of people who have visited or purchased a product or who have a high level of activity respectively. eg facebook with like and shares ( innoblogs ). The people watching the statistics they consider how indeed deserve and want themselves to use the services to belong to the majority. In other words, this is what we call behavioral economics Social Acceptance or Social Standards.

2. Toy with the name

The way you present a situation, or in this case the presentation of your web content in the sense of ‘development’ if it impresses the minds of users, they will want to ‘grow’ and aspire to reach the next level. This will likely increase the amount of money they will spend for this purpose. Based on the science of Behavioral Economics this tactic is called Framing Effect and it has to do with the different conclusions that one can draw based on how the same content is framed.

3. Limit on selection

It is a fact that when we have to choose from many choices there is confusion in our minds, uncertainty and ultimately inaction on the part of consumers.[2] Thus reducing options by half increases conversion rates and therefore users of a product or service.

4. Take the unnecessary steps

In a contact form for example when many items need to be filled in, it would be effective to split up multiple pages thus splitting the items into sub sections , so each page will appear quickly and easily. It is also a fact that we like fast and easy processes while being distracted by time-consuming and complicated tasks.

Neuroscience needs the help of these sectors to evolve [3] . Neuroscience science attempts to explain how investors are selected, taking into account the chemical and biological processes that take place in the brain when making financial investment decisions. This new interdisciplinary field combines tools from neuroscience , psychology and economics and answers questions about how emotions affect the process of ‘choice’ especially when it comes to financial matters.


Proponents of effective markets believe that behavioral finance is more a collection of anomalies than a genuine financial industry, and these anomalies are either quickly eradicated from the market. It is also doubtful that it has not been mathematized yet and there are no specific models. One of the m larger problems of behavioral and something which is a matter of criticism of behavioral , is that psychological theories tend to apomonononoun stories than to generalize something that is often very difficult to do.

Some economists see a fundamental schism between the experimental economics and behavioral , but prominent behavioral and experimental economists tend to m shared by techniques and approaches to answer common questions. Traditional economists are still skeptical of the empirical techniques that mainly use behavioral models .

Some more reviews are:

The use of laboratory experiments in behavior has drawn strong criticism in recent years. Some of these are:

  • Experienced psychological tests report that many of the people who participated in the tests came from western, civilized, industrial, rich and democratic countries and were therefore not representative and even more specifically self-selected volunteers, usually psychology graduates .
  • The observed behavior of the individual in the laboratory is not realistic – usually the answers given are not realistic that there are no permanent and financial consequences for the participants.
  • Discoveries about the past from behavioral experiments are not generalizable – they are easily modeled in the future, the social context of one generation is often different from another.


In conclusion, therefore, we observe that the impact of financial behaviors is wide with many applications. The acceptance of the industry gradually by the academic community is evident with the second Nobel Prize in Finance 2017 by Richard Thaler  [4] in behavioral economics in such a short time, thus demonstrating the need for economic to “open” again in the other social sciences. Today its dominant economic theory and its neoclassical tenets are reminiscent of medieval theology, reproducing the same sermon, each time in a more sophisticated way, without criticizing it. In an age of constant change and reform, would it not be better to look at the economy in a more humane way to find solutions to today’s complex problems of a demanding world since technocracy does not take all parameters into account?


[1] Since the 1970s and m after the central theory that dominated the financial science is the Theory of Effective Market ( Efficient Market Hypothesis ), is a fundamental economic theory states that financial markets are always fully up to date, that is, present values ​​of securities fully reflect all relevant and available information in an effective manner and are constantly changing to incorporate any new information that may arise.

[2] Paradox of many choices

[3] Players are invited to participate in games of economic interest (usually derived from game theory) and their performance is rewarded with real money. Magnetic resonance imaging techniques are used to study which areas of the brain are active during the players’ decision-making process.

[4] Anaferthike in the defined rationality, lack of self-control, social preferences, and also gave emphasis on Mental Accounting.

Original Source:

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Behavioral Finance Alexakis X, Xanthakis (2008)
Thinking Slow and Fast Tversky , A. and Kahneman , D (2004)
Nudge Unit Greece. (2019). Terms – Nudge Unit Greece. [online] Available here [Accessed 4 Jul. 2019].
HuffPost Greece . (2019). The science of neuroscience and its utility. [online] Available here [Accessed 4 Jul. 2019].
Power Polotics (2019). Nobel Prize in Finance 2017. [online]. Available here [Accessed 18 Jul. 2019]. (2019). Contrarian Vs. Momentum . [online] Available here [Accessed 12 Aug. 2019].
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