Standard finance stand on the arbitrage principles of Miller & Modigliani, the portfolio principles of Markowitz, the capital asset pricing theory of Sharpe, Lintner & Black, and the option-pricing theory of Black, Scholes & Merton.
These approaches consider markets to be efficient and are highly normative and analytical.
Marketing is a philosophy of the underwriter, determining the strategy and tactics of his activities in the conditions terms of competition. Marketing simultaneously combines market research, new product development, distribution, advertising, promotion, product improvement and so on.
The presence of regularly occurring anomalies in conventional economic theory was a big contributor to the formation of behavioural finance. These so-called anomalies, and their continued existence, directly violate modern financial and economic theories, which assume rational and logical behaviour.
A relevant point of criticism, levied against traditional models in economics and finance, is that they are often formulated as if the typical decision-maker were an individual with unlimited cerebral RAM. Such a decision-maker would consider all relevant information and come up with the best choice under the circumstances in a process known as constrained optimisation.
In the previous chapters, we argued that behavioural considerations can contribute to an understanding of certain anomalies in the pricing of individual stocks as well as in the aggregate value of the stock market.
Having concluded in the previous chapter that behavioural factors, to a large extent, can help us account for cross-sectional anomalies and aggregate stock market puzzles time has come to look into some of the most famous financial bubbles.