Beyond Greed and Fear---Trash Behavioral Finance as Completely as Possible - Book Report/Review Example

According to the author, a number of downsides of behavioral finance have become obvious as more studies are being carried out in this field of study. In essence, these limitations have undermined the purpose of behavioral finance, which is to have a clear understanding on how financial markets are evolving and the investor’s behavior toward them. In as much as we wish that behavioral finance be adapted instead of traditional finance because of its descriptive charm, we will be making a big mistake because its limitations are more than its benefits.

Therefore, before we embark on preaching how behavioral finance is interesting we should first take into considerations these limitations and their detrimental consequences to the financial markets and economy at large. One of the negative impacts portrayed by this field as per the author is that behavioral technique used in studies may not result in accurate conclusions, as they tend to influence the study subjects in one way or another. Employing behavioral finance techniques when we advise clients tends to result in recommended portfolios that resonate well with the clients, but which are not likely to be optimal in terms of the relationship between risk and reward.

Some of the ways these behavioral finance techniques are disadvantageous include: The author also says that like any other form of psychological research, behavioral finance also has the challenge of handling sentient research subjects. In the case of a scientist studying weather patterns, we do not expect the weather to recognize this and as a result change the way it behaves. However, if it were to be a human being studied it will be a different story because human research subjects are in a greater sense more complex.

Once we get an impression that we are under investigation or someone is conducting an experiment our behavior changes automatically. We start