Read Now Behavioral Finance 101: Cognitive Financial Economics Kindle
Textbook theory in 'modern' finance revolves around market efficiency that in turn revolves around informational efficiency. For example, it is often stated by adherents of that now quasi-religion that the lack of a 'free-lunch' proves that the markets are priced "efficiently". Nothing could be further from the truth. In fact, and one of the themes of this book, is that there are many documented 'free-lunches' (i.e., as defined by academics) but very likely very few truly free lunches in the financial markets that one can eat.Reviewed in this book is the fact that neither market efficiency or informational efficiency is a good description of how prices are actually set in the financial markets today. Behavioral finance which emphasizes: (A) limits to arbitrage, and (B) psychology does provide a superior prism or worldview through which to analyze actual price setting in the financial markets. It is a somewhat cruel irony that a practical field such as finance has evolved into a theory laden quasi-religion with a facade of math attempting to insulate it from being evaluated with anything approaching a critical eye. As argued in this book, behavioral finance is not merely some add-on to finance, it is another approach to finance; and practitioners and academics would be wise to view behavioral finance in that light.
