Abstract:

With the recent financial crisis, the debate of the validity of the efficient market hypothesis has been raised once again, since the stock market crash of 1987. This investment theory in a simple way states that financial markets are efficient and make a rational allocation of resources because all of the available information is reflected into prices. However, as many economists recently claimed, this financial crisis has considerably disproved the theory of market efficiency; indeed the new science of behavioral finance has proved to be true. The aim of this paper is to analyze from a behavioral approach the recent financial crisis. Are financial markets’ participants rational? What is the role of their animal spirit in bubbles and bursts? Do the greed, optimism, confidence and other related sentiments dominate the homo economicus? Reviewing literature and discussing arguments of prominent economists and behaviorists such as Fama, Thaler and Shiller, we provide a simplified human story of financial crisis beyond ARMs, SIVs, CDOs, CDSs and the like.

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