Insights From Behavioral Finance
This chapter comments on the paper Overconfidence and Speculative Bubbles, by José A. Scheinkman and Wei Xiong. In their paper, Scheinkman and Xiong propose a behavioral-based model for studying asset price bubbles and trading volume based on heterogeneous beliefs generated by agents' overconfidence. The chapter presents a detailed overview of behavioral finance from the perspective of asset bubbles and challenges the notion that pure fundamentals and rationality drive decision-making and pricing. It suggests that behavioral issues must be more fully incorporated into decision-making models and concludes by discussing asset price bubbles in view of the financial crisis of the late 2000s.
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