The Contrarian Challenges Facing Behavioral Finance

J.Peter Guo

doi:10.54097/51tzcd54

Authors

J.Peter Guo

DOI:

https://doi.org/10.54097/51tzcd54

Keywords:

Rational Expectations, Efficient Market Hypothesis, Utilitarian Theory, Behavioral Finance, Prospect Theory, Endowment Effect, Bounded Rationality

Abstract

In behavioral finance, the efficiency of markets is questioned due to potential influences of irrational human behavior. This paper investigates how these behaviors conflict with traditional finance theories and summarizes prominent behavioral traits. While there are many more non-rational human foibles than covered in this paper, this paper has presented just three behaviors that are viewed as non-rational. Those that have been presented are sufficient to cast doubt on the validity of our traditional views of finance and financial models. It is unclear at this time whether markets are completely efficient, only partially, or completely inefficient. It is important to ascertain the extent to which markets reflect efficient prices or not. Furthermore, it is possible that markets are generally, but not always, efficient, as many argue. The answer to this conundrum will profoundly affect the extent to which we accept or reject the traditional valuation models.

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