Finance Assumptions: Traditional versus Behavioral
Finance Assumptions:
Traditional versus Behavioral
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Summaries
The
followings are the differences between the basic assumptions of traditional and
behavioral finance
|
Traditional
Finance |
Behavioral
Finance |
|
Risk Aversion |
Loss Aversion |
|
Rational Expectation |
Biased Expectation |
|
Asset Integration |
Asset Segregation |
Loss Aversion: Instead of searching for minimum risk for a given
return, investors try to avoid certain
small loss but go for uncertain large
loss. Uncertain loss means there is still a possibility of gain. So investors keep holding losing investment instead of selling to
stop at small loss.
Biased expectation: Investors do not take all information into account
and are overconfident.
Asset Segregation: Investors do not consider the portfolio as a whole
in making decision.