Irrational markets elude staid market theories

Market experts should give more thought to irrational thinking, according to Mahrt-Smith, an associate professor of finance at the University of Toronto’s Rotman School of Management who spoke last week at the University of Toronto.

Behavioral finance offers a fresh way to view the market ups and downs.

One of the roles of behavioural finance, which is the study of non-rational decision-making and the ways such decisions impact financial markets, is to fill in the gaps of rational finance theories, Mahrt-Smith explained. For instance, behavioural finance acknowledges that investors have different expectations about investments, and that changes in investor confidence levels can impact the markets. In addition, the theory shows that emotions can play a role in investing.