جستارهای اقتصادی (Mar 2022)
A Methodological Critique of Classical Financial Economics: Behavioral financial considerations
Abstract
Standard finance is based on methodological individualism within the framework of Cartesian epistemology. Based on this rationalist structure, the investor enjoys Perfect rationality, Perfect selfishness, and Perfect willpower. Based on these three assumptions, the basic principles of investor behavior are formalized in the form of a thematic principle, and all theories are produced with a logical inference from these thematic principles. This methodological approach claims to have been able to descriptively and prescriptively describe, explain and predict the investor's behavior in the form of the principle of Optimizer Agent, but in practice, the observed data is significantly different from the theories predict, especially since the observation of numerous financial crises and the inability of this knowledge to explain them, makes a skepticism approach into the validity of standard finance. Heterodox paradigms such as structuralism, institutionalism, behaviorism, etc. have tried to explain financial crises. Behavioral finances, meanwhile, claim that the agents don’t choose per the standard model. Their behavior has a predictable bias. In the past three decades, behavioral finance has identified and categorized the types of biases in investors' behavior and provided rich literature in this regard. The question that why should we focus on investors' behavior and consider Economists as rational agents? Since classical finance theorists are human beings and their method of study is based on rationality. This study examines the historical process of methodological and philosophical foundations of standard finance in an abductive approach. According to the results of the research, classical financial theorists have been involved in bias in two ways: "methodology " and "mathematical tools" that along with investors' biases have resulted validation crisis. The prerequisite for solving these problems is a methodological modification, which is not possible in the philosophical structure of conventional economics.
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