Behavioural Finance: Is it important? What do the empirics suggest?

By using the adjective behavioural in the financial sphere, one wishes to refer to the science that took shape in the past twenty years of this century. Behavioural finance studies the influence of individual behaviour traits on decisions-making in the financial field and the effect of these on the market (Sewell, 2010). Undoubtedly, the spotlight on the existence of a variety of psychological factors influencing the process of decision-making has proved to be its most significant contribution to the field of economics and finance. This has clearly forced experts to question whether the individual always acts in a predictable and rational way. Therefore, behavioural finance has the task of explaining how individuals can react to certain events and aim to predict the irrational financial moves that many could possibly make (Hellmann, 2016). The literature on the subject can be distinguished between studies on anomalies within classical market theories (Bondt & Thaler, 1985); and those analysing investor’s behaviours that differs from classical economic theories (Odean, 1999). It can be safely stated that behavioural finance has challenged economic-financial disciplines to review and improve the way they think about efficient markets. Given the increasing complexity of financial markets, such an issue can help investors make decisions on more solid grounds. A striking statement in this context is one by behavioural researchers Barberis and Thaler (2003) at a time when behavioural finance was still coming to light: ‘We have now started with the important job of recording and understanding how investors, both amateurs and professionals, make their decisions while choosing their portfolio. Until recently such researchers were absent from the toolbox of financial economists, perhaps due to the misconception that the value of assets can be defined without any knowledge about elements of behavioural economics’. Certainly, there has been criticism about the emerging discipli