3. Behavioral Assumptions of Finance

  1. John R. Boatright
  1. John Dobson

Published Online: 13 DEC 2011

DOI: 10.1002/9781118266298.ch3

Finance Ethics: Critical Issues in Theory and Practice

Finance Ethics: Critical Issues in Theory and Practice

How to Cite

Boatright, J. R. (2010) Behavioral Assumptions of Finance, in Finance Ethics: Critical Issues in Theory and Practice, John Wiley & Sons, Inc., Hoboken, NJ, USA. doi: 10.1002/9781118266298.ch3

Author Information

  1. Professor of Finance, California Polytechnic State University

Publication History

  1. Published Online: 13 DEC 2011
  2. Published Print: 9 AUG 2010

ISBN Information

Print ISBN: 9780470499160

Online ISBN: 9781118266298

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Keywords:

  • animal behavior;
  • axioms of rationality;
  • behavioral finance;
  • ultimatum game

Summary

This chapter begins with a discussion on the axioms of rationality that includes: comparability; consistency; independence; measurability; and ranking. The broad acceptance of the sixth axiom of profit maximization is reflected in the behavioral assumptions made by financial economists in some of the classic models of finance theory. There is increasing evidence that the six axioms of financial rationality do not reflect the complexity and multifaceted nature of behavior in many financial contexts. The behavioral assumptions of finance-as encapsulated in the six axioms-dictate a single simple strategy for the ultimatum game. The results of the ultimatum game indicate that many humans place some intrinsic value on fairness or fair distribution. The chapter demonstrates that the notion of managerial effectiveness, as it has evolved in American business schools, is premised on a single narrow concept of rationality.

Controlled Vocabulary Terms

behavioral finance