Behavioral Science is Wonderful to Be Sure: But is it Scientific, Too?
DOI:
https://doi.org/10.14738/abr.67.4941Keywords:
Stock market, investment strategies, falsifiability, behavioral financeAbstract
Behavioral finance is touted as, among others, a scientific approach to investment which combines psychology and economics, and investigates the consequences in markets when some of its participants display not logically perfectly-informed risk-averse utility-maximizing behavior, but instead act like actual human beings. Two questions are considered: (1) “What does the science of behavioral finance imply about the behavior of stock prices?”; and also (2) “Are the predictions that behavioral makes about the behavior stock prices scientific?” This is a thought piece organized around these two questions. Using Popper’s framework that scientific hypotheses require falsifiability, we conclude that behavioral finance is only falsifiable (and thus “scientific”) in a limited sense.
References
. Popper, K., Conjectures and Refutations, London: Routledge and Keagan Paul, 1963, pp.33-39; from Theodore Schick, ed., Readings in the Philosophy of Science, Mountain View, CA: Mayfield Publishing Company, 2000,pp.9-13.
. Bergen, J.V. Jason Van (17 February 2004). “Efficient Market Hypothesis: Is The Stock Market Efficient?” (http://www.investopedia.com/articles/basics/04/022004.asp). Investopedia.
. Samsa, G. A new critique of the traditional method for empirically estimating the returns associated with strategies of stock investment: impact of fixing the investment horizon. Bentley University Case Studies in Business Industry and Government Statisticsm 2014. 5(2):p.102-110.
. Fama, E., & French, K. “Dissecting Anomalities”. Journal of Finance. 2008. 51(1):p.55-84.
. Dreman,D.N., & Berry, M.A. “Overreaction, Underreaction, and the Low-P/E Effect”. Financial Analysts Journal. 1995.51(4):21-30.
. Daniel, K., Hirshleifer, D., & Subrahmanyam, A. Investor psychology and security market under-and overreactions. Journal of Finance,1998. 53:p.1839–1885.
. Heukelom, F. Behavioral economics. New York, NY: Cambridge University Press, 2014.
. Kahneman, D., & Riepe, M. W. Aspects of investor psychology. Journal of Portfolio Management, 1998. 24, 52–65.
. Lakonishok, J., Shleifer, A., & Vishny, R. W. Contrarian investment, extrapolation, and risk. Journal of Finance,1994. 49:p.1541–1578.
. Sahi, S. K., Arora, A. P., & Dhameja, N. An exploratory inquiry into the psychological biases in financial investment behavior. Journal of Behavioral Finance,2013. 14:p.94–103.
. Shiller, R. J. From efficient markets theory to behavioral finance. The Journal of Economic Perspectives, 2003. 17:p.83–104.
. Duxbury, D. Behavioral Finance: Insights from experiments I: Theory and financial markets. Review of Behavioral Finance,2015. 7(1):p.78 -96.
. Sinclair, Upton. I, Candidate for Governor: And How I Got Licked (1935), ISBN 0-520-08198-6; repr. University of California Press, 1994, p. 109.
. Malkiel, B.G. A Random Walk down Wall Street: the Time-Tested Strategy for Successful Investing. New York: W.W. Norton, 2003.
. Bogle., J.C. The arithmetic of “all in” investment returns. Financial Analysts Journal, 2014. 70(1):p.1-9.
