Question

explain the relationship between the behavioral finance and the finical crisis with ( literature reviews and discussion )

minimum 800 word please!

thanks in advance

Answer 1

Behavioral finance, refers to the field of behavioral economics, which proposes that psychological influences and biases affect the financial behaviors of investors. It also states that influences and biases can be the source for explanation of all types of market anomalies in the stock market, such as severe rises or falls in stock price.

financial crisis is a situations in which some financial assets lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults.

Many economists offered theories about how financial crises develop and how they could be prevented. There is no consensus, however, and financial crises continue to occur from time to time even today. The latest being the crises of 2020 caused by Covid-19.

RELATIONSHIP BETWEEN BEHAVIOURIAL FINANCE AND FINANCIAL CRISIS -

Global financial crisis brought the world banking system to collapse. The continuing operation of financial markets became possible only after the extensive and costly public rescues of some very big banks. It also brought into sharp focus the inadequacies of the contemporary model of financial regulation both at the national and the global level. To cope up with financial crises, what is required is a radical rethinking of the contemporary model. It also proposed the establishment of a global licensing and supervisory regime for transnational investment funds with systemic importance, eliminating most shadow banking operators. The catastrophic consequences of the crisis and the findings of behavioural finance provide solid support for these proposals.