Behavioral Assumptions of Finance

Abstract

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

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