PSU ACCTG 597E - Traditional vs. Behavioral Finance (19 pages)

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Traditional vs. Behavioral Finance



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Traditional vs. Behavioral Finance

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Pages:
19
School:
Pennsylvania State University
Course:
Acctg 597e - Research Seminar in Analytical Models

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Johnson School Research Paper Series 22 2010 Traditional vs Behavioral Finance Robert Bloomfield Cornell University April 2010 This paper can be downloaded without charge at The Social Science Research Network Electronic Paper Collection Electronic copy available at http ssrn com abstract 1596888 Traditional Versus Behavioral Finance ROBERT BLOOMFIELD NICHOLAS H NOYES PROFESSOR OF MANAGEMENT AND PROFESSOR OF ACCOUNTING CORNELL UNIVERSITY INTRODUCTION The traditional finance researcher sees financial settings populated not by the error prone and emotional Homo sapiens but by the awesome Homo economicus The latter makes perfectly rational decisions applies unlimited processing power to any available information and holds preferences welldescribed by standard expected utility theory Anyone with a spouse child boss or modicum of self insight knows that the assumption of Homo economicus is false Behavioralists in finance seek to replace Homo economicus with a more realistic model of the financial actor Richard Thaler a founding father of behavioral finance captured the conflict in a memorable National Bureau of Economic Research NBER conference remark to traditionalist Robert Barro The difference between us is that you assume people are as smart as you are while I assume people are as dumb as I am Thaler s tongue in cheek comparison aptly illustrates how the modest substantive differences in traditionalist and behavioralist viewpoints can be exaggerated by larger differences in framing and emphasis bringing to mind the old quip about Britain and America being two nations divided by a common tongue For what it is worth when confirming this account of the exchange Thaler reports that Barro agreed with his statement The purpose of this article is to guide readers through this debate over fundamental assumptions about human behavior and indicate some directions behavioralists might pursue The next section provides a general map of research in finance and describes in greater



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