ARE INVESTORS MORE HOMO SAPIENS RATHER THAN HOMO ECONOMICUS: A BEHAVIORIST APPROACH TO FINANCIAL CRISIS

Year 2013, Volume: 5 Issue: 1, 168 - 179, 01.06.2013

Güngör Turan Pranvera Latifi

Abstract

With the recent financial crisis, the debate of the validity of the efficient market
hypothesis has been raised once again, since the stock market crash of 1987. This
investment theory in a simple way states that financial markets are efficient and
make a rational allocation of resources because all of the available information is
reflected into prices. However, as many economists recently claimed, this
financial crisis has considerably disproved the theory of market efficiency; indeed
the new science of behavioral finance has proved to be true.
The aim of this paper is to analyze from a behavioral approach the recent financial
crisis. Are financial markets’ participants rational? What is the role of their animal
spirit in bubbles and bursts? Do the greed, optimism, confidence and other related
sentiments dominate the homo economicus? Reviewing literature and discussing
arguments of prominent economists and behaviorists such as Fama, Thaler and
Shiller, we provide a simplified human story of financial crisis beyond ARMs,
SIVs, CDOs, CDSs and the like.

Keywords

Financial crisis, Information Market Efficiency, Behavioral Finance

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