Classical Behavioural Finance Theory

Abstract

Behavioural Finance Theory is a modern approach to finance theory – which, in turn has three wings in its standard versions: the theory of finance based on subjective expected utility theory, in conjunction with the efficient market hypothesis theory (with Bayes’s rule as an auxiliary assumption for updates); the Shafer-Vovk approach via the use of Ville’s arithmetic game version; and that which is based on the work of Bachelier, Osborne and Mandelbrot which is called the Econophysics vision. Dissatisfaction with the theoretical, empirical and experimental fundamentals of these three approaches has led, in the last quarter of a century, to the development of the field of modern behavioural finance theory. This is based on the early work of Thaler, Tversky and Kahneman. In this paper, this view is contrasted with the prior work of Herbert Simon, and is called Classical Behavioural Finance Theory.