The most concise explanation of behavioral finance I’ve ever seen

/The most concise explanation of behavioral finance I’ve ever seen

The most concise explanation of behavioral finance I’ve ever seen

By | 2017-08-18T16:55:27+00:00 January 29th, 2016|Research Insights, Behavioral Finance|1 Comment

One of the most overused– and misunderstood — terms I’ve seen used by finance practitioners is “behavioral finance.” Many professionals consider themselves to be “behavioral finance experts” because they identify irrational investors.1

Newsflash: Identifying irrational investors is not behavioral finance.

But here is a great summary from a Baker, Bradley, and Wurgler paper we’ve covered in the past:

Behavioral models of security prices combine two ingredients. The first is that some market participants are irrational in some particular way…The second ingredient is limits on arbitrage, which explain why the “smart money” does not offset the price impact of any irrational demand.

Too many practitioners focus on irrational investors and too little attention on limits of arbitrage. We go in depth on the subject of behavioral finance here and explain why it is much more complicated to exploit irrational behavior than many want to believe.


1. It is a bit ironic that some research identifies that professionals ARE the irrational investors).

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About the Author:

Wes Gray
After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes,, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.

One Comment

  1. OVVO Financial January 29, 2016 at 11:42 am

    Behavioral finance in financial market theory, utility theory, portfolio theory and the necessary statistics: A review

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