Abstract
The main purpose of this paperwork is to enlighten and expand the knowledge of the behavioural
finance field of study by showing the importance of understanding the financial markets behaviour
and evaluate if subsequent to psychological biases findings overall risk limits should be set at
board level in the risk framework of banking institutions and converted to limits applicable to the
individuals responsible for managing risks.
Inspired by the studies of Kahneman and Tversky in the 1970’s, behavioural finance is a relatively
new area of knowledge that has been gaining an exponential visibility especially over the past few
years as a result of its managers and investors incapability of behaving according to the
assumptions made in the traditional finance theory. The list includes events such as the bankruptcy
of Lehman Brothers in 2008 followed by a global financial crisis having a behavioural bias at its
root.
To synthetize, the field of study attempts to enrich and enhance high quality of executive’s
decisions offering complementary points of view and explanations in response to the difficulties
faced by the traditional corporate finance. Within this context, it is important to emphasize that the
aim of behavioural finance research in risk management is not to replace, but complement the
assessment of other precise frameworks.
The outcome this paperwork reveals that due to recent and continuous behavioural biases
awareness, the investment community is already seeking new approaches that are less reliant on
traditional investment theory in order to mitigate the role of biases in investment and managerial
decisions, however there is still room for improvement, especially for large, complex and
international financial institutions. Ultimately, several authors argue that we are unlikely to find a
‘cure’ for the biases, but the understanding of such behaviours along with appropriate financial
planning policies can play a powerful role in avoiding behavioral biases. Author keywords: Behavioural Finance, Risk Management, Banking Institutions, Decision-Making
