Financial markets are influenced by various factors but the most important factors is the reaction as well as perception of the people. Basically there are two discipline of financial market study i.e., Traditional finance and the new development called Behaviourial finance.Traditional finance foundation is truly based on efficient market concept&Behavioral finance argues that some financial phenomena can plausibly be understood using models in which some agents are not fully rational. The field has two building blocks: limits to arbitrage, which argues that it can be difficult for rational traders to undo the dislocations caused byless rational traders; and psychology, which catalogues the kinds of deviations from full rationality we might expect to see. We close by assessing progress in the field and speculating about its future course. In this paper an attempt has been made to highlight the shortcomings of the traditional finance theories as pointed out by behavioural finance supporters and also a discussion on the significance of behavioural finance. While conventional academic finance emphasizes theories such as modern portfolio theory and the efficient market hypothesis, the emerging field of behavioral finance investigates the psychological and sociological issues that impact the decision-making process of individuals, groups, and organizations. This paper will discuss some general principles of behavioral finance including the following: overconfidence, financial cognitive dissonance, the theory of regret, and prospect theory. In conclusion, the paper will provide strategies to assist individuals to resolve these “mental mistakes and errors” by recommending some important investment strategies for those who invest in stocks and mutual funds
Efficient Market Hypothesis V/S Behavioural Finance
