A new approach for management risk in financial markets

Corresponding Author email: hooshyarzadah@yahoo.com ABSTRACT: Behavioral finance has become one of the most active areas in financial economics. This paper presents a new approach to overcome this problem, by proposing a general framework based on stylized facts of human behavior (invariants).When financial markets experience a significant disruption, a systematic approach to risk management requires policymakers to be preemptive in responding to the macroeconomic implications of incoming financial market information, and decisive actions may be required to reduce the likelihood of an adverse feedback loop. Related to the individual risk taking decision, we focus: on the role of incentives; on how prior outcomes influence future decision; and on the portfolio choice problem. Our main conclusion is that absolute evaluations based on final wealth are limited and the relativity of risk taking decisions, where the perception of gains and losses drives the process, is a requirement to understand individual’s decisions.