Ellis Pristash

Comments

Finance Major

Advisor: Prof. Morey

Document Type

Thesis

Abstract

Traditional finance contains many models which misrepresent human behavior. In order to mathematicise the field and make it more like hard sciences, economics in the 20th century presupposed that people act “rationally.” In economics, rationality means adherence to the neoclassical model, which presents persons as utility maximizers. This presupposition was useful for certain applications but dominated the academic landscape. Later, the Chicago School of Economics built on the rationality premise, advocating less regulation in favor of the free market. The Efficient Markets Hypothesis was built on these same ideas and argued that markets have a wisdom that individuals do not. As a result of his belief in this hypothesis, former Fed Chairman Alan Greenspan stood idly by a market dabbling with novel financial instruments. Though at one time uneasy, he soon became convinced that rising stock prices were not a concern. When the 2008 financial crisis occurred, he was left to admit, before Congress, that the markets were not as wise as he assumed. The type of economics that led up to the catastrophe was faulty. For example, traditional economics tends to oversimply reality. Additionally, applying statistics to markets is erroneous since constituent actors are not independent of each other. Behavioral finance, the component of behavioral economics that deals with markets, presents human tendencies which impact the financial world. Therefore, it is important to include behavioral finance in introductory courses so business graduates can have the information they need to prevent future crises. Several behavioral ideas are summarized in this paper to give the reader an understanding of what the field entails and how it differs from the rationality premise. As well, the paper examines a selection of course syllabi, textbooks, and CFA bodies of knowledge to find out if behavioral economics, which may play such an important role in preventing calamities, is included in introductory courses. The findings about the field’s inclusion in textbooks is especially interesting as one publisher includes a commentary concerning their choices regarding this matter in their text. In all, however, behavioral finance is covered to a limited extent in the materials examined. There are several reasons for this, including explanations from behavioral finance itself. In the future, publishers and universities should approach the teaching of finance differently. They should present the truth of finance, even if it is not as neatly organized as what has been taught for decades.

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