Chapter 9: Homo Communitatis: A Rigorous Foundation for Behavioral Finance
H. Joel Jeffrey INTRODUCTION Behavioral finance, and behavioral economics in general, is based on the insight that the fundamental conceptual model of neoclassical economics, the rational utility-maximizing homo economicus, is unrealistic. Just as the model of planets following circular orbits had to be replaced with one based on elliptical orbits, human behavior, including economic behavior and non-economic behavior with economic impacts, is not describable in terms of rational self-interest, even if enhanced by boundedness. This raises the question of what behavioral factors to include. Barberis and Thaler, for example, note that for guidance on behavioral models economists rely on cognitive psychologists for insight into beliefs and preferences (Barberis and Thaler, 2003, p. 1054). The basic thesis of this chapter is that the range of factors that affect economic actions in general, and financial decisions in particular, is much broader than the subject matter of cognitive psychology, and that therefore both good science and predictive power demand a rigorous framework incorporating as many of these factors as possible. The question of what factors must be included is inextricably bound up with the fundamental fact that a very wide range of human actions have economic consequences. An example, discussed in more detail below, is the Tongan fakaafe, a feast in honor of a visiting Wesleyan minister (Bennardo, 1996, pp. 307–12). These feasts involve a good deal of food gathering and preparation, labor, and consumption of food, and so are quintessentially economic activities. However, they take place when the minister comes to...
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