Microeconomic foundation of financial economics

Maame Ammah Frimpomaah Fosu and Joshua Yindenaba Abor

Chapter 2 in The Elgar Companion to Financial Economics, 2025, pp 18-34 from Edward Elgar Publishing

Abstract: This chapter discusses the behaviour and expectations of economic agents in making savings and investment decisions based on theory as opposed to how these economic agents behave when making these decisions. The chapter covers prescriptive theory, which includes theories and assumptions that describe how rational agents in a neoclassical paradigm make decisions. The chapter also considers descriptive theory, which is mainly from empirical studies on how people and corporations make economic and financial decisions. The resulting outcomes may differ from what is expected under the neoclassical paradigm and prescriptive theory. This chapter examines how the underlying assumptions of rationality, zero transaction costs, and free information may not hold in the financial market due to sentimental biases and market imperfections.

Keywords: Microeconomics; Financial economics; Expected Utility Theory; Stochastic dominance (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035341399
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