Abstract:
Neoclassical asset pricing is built on the premise investors are rational and there are unlimited arbitrage opportunities. Behavioural implications
of irrational investors led to the development of the counter paradigm, behavioural asset pricing. This study systematically reviews the origin and
evolution of behavioural asset pricing distinct to neoclassical asset pricing. It addresses the two pillars of behavioural asset pricing where; investors
are not always rational and there are limits to arbitrage. The study captures investor irrationality in two perspectives; investors’ beliefs and their
preferences. It reviews psychological biases and heuristics adopted from experimental psychology to behavioural asset pricing in explaining beliefs
and preferences of irrational investors. Furthermore, it lists key biases and heuristics recognised in behavioural asset pricing literature. It discusses
theoretical behavioural asset pricing models that try to explain variation of stock returns through specifc biases of investor psychology. Lastly, the
study reviews aggregate investor sentiment studies that try to capture mass psychology of investors in fnancial markets. The signifcance of this study
is that it attempts to develop a holistic view of the foundation and evolution of behavioural asset pricing.
