A Behavioral Science Approach to Financial Research

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 the field of finance. It seems that almost all research into the behavior of the market centers around the numerical effects of investment and financial decisions. This heavy reliance on one methodology needs to be questioned. It may be that the abilities and interests of the researchers and not the nature of the 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 the rapid processing of data; in this light, the importance placed on modeling the market is understandable. At the same time, researchers may be setting limits to what they can accomplish by emphasizing the one methodology that is already safely entrenched in their discipline. Financial research, with its emphasis on the allocation of resources, is important to the 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 the psychological aspects of decision-making in financial markets. Such evidence is important to the valuation process, because the reaction of "the market" is nothing more than the aggregate of the reactions of individuals. Thus, it would seem that there are two basic ways of learning about the valuation process: quantifying the reaction of the market as a whole through the techniqu s of mathematical modeling, and probing the decision-making processes of individuals through the techniques of behavioral science. Both these have serious limitations, as do all methodologies. Financial researchers may regard the

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