Traditional finance : behavioral finance distinction in the context of expected utility and prospect theories

Abstract

Traditional finance has developed based on two fundamental assumptions, including the expected utility theory and rational choice or decision. However, this hypothesis has been criticized heavily by put forward that are not realistic enough. The basis of behavioral finance theory is based on the “prospect theory”. According to this theory individuals cannot act fully rational, they install more sense to loses than at the same amount of profit and they exhibit risk and loss aversion behaviour. Behavioral finance is intended individuals’ understanding of the reasoning patterns that used in their financial decision-making as a more realistic by including the behavioral and emotional patterns of individuals to the decision making processes. This study has focused on traditional finance and behavioral finance fields and the basics of these two fields. And also these fields are discussed and compared with general principles. This study reflects the terms of a comprehensive view on the subject. The goal of the study is to provide a better understanding of the different viewpoints that put forward by traditional and behavioral finance disciplines as a whole. Also with this study it is aimed to contribute to the theoretical background and conceptual framework that will be used in next studies.