Table Of Contentd.
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Over the last 50 years, neoclassical financial theory has been dominating r3 Rolf J. Daxhammer / Máté Facsar / Zsolt Papp
our perception of what is happening in financial markets. It has spurred
numerous valuable theories and concepts all based on the concept of e
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Homo Economicus, the strictly rational economic man. However, humans
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do not always act in a strictly rational manner.
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n Behavioral
For students and practitioners alike, our book aims at opening the door to
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another perspective on financial markets: a behavioral perspective based F
on a Homo Oeconomicus Humanus. This agent acts with limited ration-
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ality when making decisions. He/she uses heuristics and shortcuts and
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is prone to the influence of emotions. This sounds familiar in real life and o
can be transferred to what happens in financial markets, too. i
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B Limited Rationality in
Financial Markets
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3rd edition
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Dr. Rolf J. Daxhammer is professor for Financial Markets at ESB x
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Business School, Reutlingen University. D
Máté Facsar is Vice President Sales, Global Account Manager at
FactSet, a global provider of integrated financial information and
analytical applications.
Zsolt Papp, Managing Director, is a senior investment specialist in the
Global Fixed Income, Currency and Commodities group of J.P.Morgan
Asset Management, a global leader in asset management service.
ISBN 978-3-7398-3119-0
L a y o u t
L a y o u t
www.uvk.de
Behavioral Finance
Dr. Rolf J. Daxhammer is professor for Financial Markets at ESB Business
School, Reutlingen University. His teaching and research interests are Inter-
national Financial Markets, Investment Banking and Behavioral Finance. In
his consulting work he is engaged in projects in Private Wealth Manage-
ment und Financial Nudging, amongst others.
Máté Facsar is Vice President Sales for Management Consulting & Profes-
sional Services Firms at FactSet, a global provider of integrated financial
information and analytical applications. His close cooperation with Leaders
in Asset and Wealth Management over the last decade enables him to
monitor the application of Behavioral Finance and to address the challenges
Portfolio Managers and Wealth Advisors face.
Zsolt Papp, Managing Director, is a senior investment specialist in Global
Fixed Income, Currency and Commodities group of J.P. Morgan Asset Mana-
gement, a global leader in asset management services. He has 30 years’
experience in the financial industry in the UK and Switzerland on the sell-
side and buy-side, with a special focus on emerging markets.
Rolf J. Daxhammer
Máté Facsar
Zsolt Papp
Behavioral Finance
Limited Rationality in Financial Markets
3rd edition
UVK Verlag · München(cid:3)
Umschlagmotiv: © deli - Fotolia.com
Bibliografische Information der Deutschen Nationalbibliothek
Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der
Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im
Internet über http://dnb.dnb.de abrufbar.
3rd Edition 2023
DOI: https://doi.org/10.24053/9783739881195
© UVK Verlag 2023
– ein Unternehmen der Narr Francke Attempto Verlag GmbH + Co. KG,
Dischingerweg 5 · D-72070 Tübingen
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ISBN 978-3-7398-3119-0 (Print)
ISBN 978-3-7398-8119-5 (ePDF)
ISBN 978-3-7398-0586-3 (ePub)
Preface 3rd Edition
The most obvious adjustment in the 3rd edition of “Behavioral Finance” is its lan-
guage. This is the first time, that it is available in English, too. And with the addi-
tional language comes another author: Zsolt Papp. He brings the weight of thirty
years in the financial industry to the team, adding even more “reality check” to
the book’s blend of theoretical rigour and practical perspective.
As for all good economists the prime motivation for offering a product variation
is demand. Over the last ten years we have learnt that our approach to insights
into Behavioral Finance is not only appreciated by a German speaking audience,
but by an international one, too. So, the basic concept of the book remains un-
changed. In addition, we have added some up-to-date information especially in
chapter 5 on historic and recent speculative bubbles and in chapter 13 on latest
developments.
With all that we hope that the reader will enjoy this 3rd edition as much as the
previous ones.
December 2022: Rolf Daxhammer, Máté Facsar and Zsolt Papp
Online Knowledge Check available:
https://files.narr.digital/9783739831190/Check.zip
Dedication
To Gela Daxhammer
as well to Josef Daxhammer
and Katharina Daxhammer
To Fanny Facsar
and Gábor Facsar
To Mária Erzsébet and Sándor Papp
and Marcsi
Table of Content
Preface 3rd Edition ................................................................................................................ 5
Dedication .............................................................................................................................. 7
Introduction ......................................................................................................................... 15
Section I − The Homo Economicus in the center of Traditional Finance ... 21
1 How Neoclassical Theory shaped rational economic behavior ..... 21
1.1 From Traditional Finance to Emotional Finance ........................................... 22
1.2 Classical theories of Traditional Finance ........................................................ 29
1.2.1 The rational economic market participant according to Smith ................. 29
1.2.2 Random Walk Theory according to Bachelier ............................................... 31
1.2.3 Expected Utility Theory according to von Neumann & Morgenstern ..... 36
1.2.4 Information processing according to Bayes ................................................... 40
1.2.5 Efficient Market Hypothesis according to Fama ........................................... 42
Summary Chapter 1 ........................................................................................................... 48
2 Limitations of Traditional Finance ........................................................... 51
Models of Neoclassical Capital Market Theory ............................................. 51
Portfolio Selection Theory ................................................................................. 51
Capital Asset Pricing Model (CAPM) .............................................................. 58
Arbitrage Pricing Theory as an alternative to CAPM .................................. 62
2.2 Valuation methods as a basis for financial decisions ................................... 64
2.2.1 Fundamental Analysis ......................................................................................... 65
2.2.2 Technical Analysis ............................................................................................... 70
2.3 Old vs. new reality ‒ the Black Swan .............................................................. 75
Summary Chapter 2 ........................................................................................................... 78
Concluding remarks Section I ......................................................................................... 79
Section II ‒ Recurring speculative bubbles ‒ triggered by the Homo
Economicus Humanus ........................................................................ 81
3 Investor behavior from the perspective of Behavioral Finance .... 81
3.1 Starting point and objective of Behavioral Finance...................................... 81
3.1.1 Evolving concept of rationality ......................................................................... 84
3.1.2 Departure from the Expected Utility Theory ‒ Bounded Rationality ........ 88
3.2 Change of perspective within the framework of Behavioral Finance ...... 90
