Working Paper: NBER ID: w3731
Authors: Richard Zeckhauser; Jayendu Patel; Darryll Hendricks
Abstract: The insights of descriptive decision theorists and psychologists, we believe, have much to contribute to our understanding of financial market macrophenomena. We propose an analytic agenda that distinguishes those individual idiosyncrasies that prove consequential at the macro-level from those that are neutralized by market processes such as poaching. We discuss five behavioral traits - barn-door closing, expert/reliance effects, status quo bias, framing, and herding - that we employ in explaining financial flows. Patterns in flows to mutual funds, to new equities, across national boundaries, as well as movements in debt-equity ratios are shown to be consistent with deviations from rationality.
Keywords: behavioral economics; financial markets; irrational behavior; market efficiency
JEL Codes: D81; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| individual irrationality (D01) | financial market behavior (G40) |
| behavioral traits (D91) | deviations from rationality (D01) |
| deviations from rationality (D01) | observable patterns in financial flows (F30) |
| deviations from rationality (D01) | movements in debt-equity ratios (G32) |
| nonrational behavior (D01) | market efficiency (G14) |
| speculative fads (D84) | market crashes (G01) |
| collective market behavior (D16) | efficiency of markets (G14) |