Psychological entropy theory in behavioral finance

Subject Areas : Journal of Investment Knowledge

Mohammad Namazi ¹ , Sholeh Mansoory ²

1 - Professor of Accounting, Shiraz University
2 - Ph.D. student of Accounting, Shiraz University

Received: 2013-10-16 Accepted : 2014-03-05 Published : 2014-03-05

Keywords: Psychological entropy, Economical finance, Behavioral Finance, Market paradigms,

Abstract :

Despite the new finance theory and efficient market assumption in capital markets, some empirical documents and market anomiles causes a new theory called behavioral finance. This theory describes the psychological process effects in financial decision makings and the way in which one would determine the financial market behavior. This approach which is the result of the Psychology and finance combination have led to more accurate and contemporary aspects of human behavior in financial markets. This research is empirical and descriptive in this paper after the introduction of the development of the behavioral finance, the entropy theory and physiological patterns of human decisions are illustrated. It is concluded that entropy theory can be implemented to understand and predetermine the investors behavior in financial markets. There are several important personal entropy factors that affect the behavioral finance: these are: Conservation principle, plan or agency, collective behavior, over confidence loss- aversion and risks taking. Hence, the financial advisors can suggest portfolios which are proportionate to investors objectives and attitudes. It is expected that behavioral models development and observed phenomena explanation would lead to market and the optional use of the information in the markets.