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Financial markets play a vital role in economies around the world. They facilitate the interactivity between those who are in need of capital and those with capital to invest. While its own separate entity, the stock market is correlated with the economy in various ways in which one may significantly impact the other on a regular basis. Thus, investors and firms participating in markets have much power in influencing the economy. Human behavior is prone to biases that are not accounted for in standard finance theory but is the subject of behavioral economics by utilizing psychology and sociology to aid in analyzing such behavior. The primary aim of this study is to examine some of the cognitive biases investors are typically exposed to and practice when making their financial decisions. Such discussions of cognitive errors are accompanied by a case study of Robinhood users. Observing a real world scenario regarding financial irrationality may be helpful in amplifying the foundations of behavioral finance. Additionally, four econometric tests were run to support test specific predictions made by behavioral finance models. All findings were in favor of behavioral finance, displaying evidence of cognitive biases in investor behavior while also rejecting elements of standard finance theory.
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Arciola, Robert Michael, "The Foundations of Behavioral Finance: A Case Study of Robinhood Users and the Impact of Biases in Financial Markets" (2022). Senior Projects Spring 2022. 99.
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