Chapter 20 Human behavior and the efficiency of the financial system Recent literature in empirical finance is surveyed in its relation to underlying behavioral principles principles which come primarily from psychology sociology and anthropology. The behavioral principles discussed are: prospect theory regret and cognitive dissonance anchoring mental compartments overconfidence over and under reaction representativeness heuristic the disjunction effect gambling behavior and speculation perceived irrelevance of history magical thinking quasi magical thinking attention anomalies the availability heuristic culture and social contagion and global culture.