Behavioral Finance
Most models assume that financial markets are efficient, yet the existence of durable disequilibria and the increasing
set of paradoxes rising from the recent past necessitate the adoption of new tools describing the bounded rationality
of human agents. The LSF develops theoretical and experimental works in this field in collaboration with external
institutions.
Prospective Program
Most well known financial models (evaluation of contingent assets, Black and Scholes [1973], Merton [1973]: equilibrium of financial assets, Sharpe [1964]: the portfolio theory, Markovitz [1952]) rely on a specific set of hypotheses which can be considered as the “standard paradigm” of finance. As mentioned by Roger, Broihanne and Merli [2005], “standard finance” supposes that an agents’ rationale relies on expected utility, and that markets are efficient at equilibrium.
Nevertheless, the existence of durable disequilibria, and the increasing set of paradoxes rising from recent financial experiments reflect the lack of realism of such paradigms and necessitate the adoption of new tools to describe the rationality of agents.
The aim of behavioral finance is to change the description of computations made by financial agents in order to reconcile their behavior with observed facts. This new paradigm relies on diverse approaches (non-expected utility (Choquet), case-based decision theory (Gilboa and Schmeidler, etc.). Such diversity may reflect the lack of maturity of some approaches, which compete against each other to a large extent. From a theoretical point of view, these approaches need additional comprehensive fundamental research in order to assess each of them and to adopt a widespread consensus. From an empirical point of view, additional experiments need to be undertaken inside the LSF and/or in partnership with other experimental research centers.
Because such a research program is quite new, this first one involves external partnerships with well-established behavioral finance laboratories. At the same time, this process requires internal recruitments (term: 3-4 years).
