A Behavioral Science Approach to Financial Research

Abstract

boy a hammer, and he will find that everything he encounters needs pounding [14, p. 28]. Mathematical modeling of a very specific nature has become just such an instrument in field of finance. It seems that almost all research into behavior of centers around numerical effects of investment and financial decisions. This heavy reliance on one methodology needs to be questioned. It may be that abilities and interests of researchers and not nature of subject matter have dictated methodology in financial research. Today most financial researchers are well schooled in quantitative techniques and have ready access to computer facilities for rapid processing of data; in this light, importance placed on modeling is understandable. At same time, researchers may be setting limits to what they can accomplish by emphasizing one methodology that is already safely entrenched in their discipline. Financial research, with its emphasis on allocation of resources, is important to future of our conomy far too important to be limited arbitrarily to one research methodology. This paper considers an additional methodology in finance that of behavioral science. Traditionally financial researchers have dealt almost exclusively with data that can be quantified in a predetermined way; in doing so, they have disregarded evidence on psychological aspects of decision-making in financial markets. Such evidence is important to valuation process, because reaction of the market is nothing more than aggregate of reactions of individuals. Thus, it would seem that there are two basic ways of learning about valuation process: quantifying reaction of as a whole through techniqu s of mathematical modeling, and probing decision-making processes of individuals through techniques of behavioral science. Both these have serious limitations, as do all methodologies. Financial researchers may regard