Overconfidence, Loss Aversion and Irrational Investor Behavior: a Conceptual Map

Abstract

Desarrollo de un mapa conceptual de la literatura en Behavioral Finance

This paper develops a conceptual map of the literature on behavioral finance related to asset pricing, by a review and synthesis of the literature. We analyze the empirical evidence of financial market anomalies related with overreaction and underreaction and present an overview of the main psychological theories that describe irrational investor behavior: the Representativeness Heuristic and Prospect Theory. We go on to describe and classify the behavioral models based on overconfidence, loss aversion, herding and other irrational biases that explain the lack of correlation between risk and return in the financial markets. In order to contribute to further systematization in the field, we draw a conceptual map showing the relationship between the referred psychological theories and behavioral models. Finally, we address the critics and alternative theories and identify issues for further research, introducing among others the concepts of rational irrationality and the time variable as key factors in the analysis of irrational market behavior.