Behavioral Finance as a Human Dimension of Finance in the Context of Cognitive Bias and Heuristics: A Literature Review and Compilation Study

There are two basic assumptions of traditional finance theory. These are individuals are rational and aim to maximize their benefits in accordance with the assumptions of expected utility theory. Rational decision making under uncertainty that is the work done for the first time by Savage (1954) requires that individuals give probabilities to possible outcomes of events and harmonize the means to assess these outcomes. However, as can be seen in the traditional theories, the process of conducting such estimations and decision making processes that can cause serious negativity is an important issue that cannot be reduced to pure mathematical models. At this point, the human nature factor must be taken into account. The biases and the preferences that go beyond the standards in the field of psychology have been applied to investor behavior by the behavioral finance field. The example of deviation from full rationality was revealed by Simon (1957), which suggested bounded rationality. Bounded rationality assumes that some cognitive limitations or costs of information collection prevent decision-makers from making the most appropriate decisions. As the physical and social world is too complex to be predicted, it becomes more difficult to make decisions about the future and uncertainty. For this reason, individuals often tend to look for ways to make decisions easily and effortlessly. According to the biases and heuristics approach, people use cognitive shortcuts that are open to false assessments while making probability assessments. In this study, behavioral finance discipline, cognitive prejudices and crescents are discussed and studies on the subject are discussed. This study is a literature review and compilation study.ngilizc