engleski

The (ir)rationality of market participants – behavioral finance perspective

Per behaviorism, as a primary psychological approach, human behaviour deserves to be the subject of scientific research. Behaviorism is a science studying and analysing the people’s behaviour which seeks to explain, describe, and predict certain human behaviour, what people do and how they work, think, and why certain behaving decisions are made. Behaviorism finds its place in various areas, including the economy, because it deals with the issue how psychology impacts the individuals (market participants in the economic context) - from individual to institutional investors, on the economic decision-making, as well as the price movements. The theme of this paper is the specific research area studying different effects on the behaviourand decisions of market participants which is the area of behavioral finance. Although seemingly incompatible, the economy, especially financial one, can be put in the context of psychology through behaviour of market participants and their decision- making. Erroneous, irrational financial decisions are the result of different unpredictable reactions of individuals faced with losses and high market risks. Therefore, for decision-making it is essential to consider all the factors in the market, which creates place for behavioral finance. As a new approach to the field of finance, when studying market participants’ behaviour, behavioral finance considers different aspects of individuals (market participants), with psychological factors as extremely influential ones. Behavioral finance focuses on determining how and why market participants make certain decisions in a specific way, or how they respond to and interpret information from the environment. Therefore, the task of behavioral finance, and at the same time the main objective of this paper, is to explore the ways and the extent to which human behaviour can affect financial decisions of individuals and institutions, price trends, as well as the results it can have.

behavioral finance ; (ir)rationality of market participants ; market risk, psychological factors ; market deviations ; decision-making

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