The rational-behavioral debate in financial economics

Alon Brav, J. B. Heaton and Alexander Rosenberg

Journal of Economic Methodology, 2001, vol. 11, issue 4, 393-409

Abstract: The contest between rational and behavioral finance is poorly understood as a contest over 'testability' and 'predictive success.' In fact, neither rational nor behavioral finance offer much in the way of testable predictions of improving precision. Researchers in the rational paradigm seem to have abandoned testability and prediction in favor of a scheme of ex post 'rationalizations' of observed price behavior. These rationalizations, however, have an unemphasized relevance for behavioral finance. While behavioral finance advocates may justly criticize rationalizations as unlikely to lead to a science of financial economics with improving predictive power, rational finance's explanatory power plays a key role supporting the limits of arbitrage arguments that make behavioral finance possible.

Keywords: market efficiency; event study; behavioral finance; Friedman (search for similar items in EconPapers)
Date: 2001
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/1350178042000177978 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:jecmet:v:11:y:2001:i:4:p:393-409

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RJEC20

DOI: 10.1080/1350178042000177978

Access Statistics for this article

Journal of Economic Methodology is currently edited by John Davis and D Wade Hands

More articles in Journal of Economic Methodology from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().