I recently had my 10 year business school reunion. Being the business nerds we are, we had additional classes. Here are some thoughts from one of those:

Behavior Finance by Professor Malcolm Baker

From the session summary:
“At the foundation of finance theory is the idea that investors and managers act rationally… behavioral finance proposes a broader role for social, cognitive, and emotional biases”

Think of it as a bridge between psychology and economics. Economists, basically, work to find the underlying models that best describe how we make decisions in our lives. They don’t believe that we actually do complex math when deciding whether to buy the Tall vs. Grande, but they say, that on average, we all behave as if we were actually doing the the math. Do you wake up and think about your “Expected Utility”? You act like it. Psychologists focus more upon the times when individual act against their best interests. In other words, when their emotions or biases make them behave against the economists model. The press likes to point out the gap between the economists and psychologists, but it isn’t as wide as they paint.

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