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The End of Behavioral Finance?

Back during the peak of the Internet bubble economist Robert Thaler wrote a fantastic piece on the future of behavioral finance.  In the piece Thaler not only predicted that we would look back at the 1999 and surrounding Internet craze as the “Great Internet Stock Bubble”, but he also predicted that behavioral finance would become the norm in the field of economics.  One of those predictions was very right.  The other, unfortunately, remains somewhat uncertain as behavioral finance has become a field that more people are interested in, but few in economic academia assimilate into their views.

Fortunately, I think we will one day look back at Thaler’s predictions as both having been right.  But that day is not here yet.  While Robert Shiller has won a Nobel Prize and Daniel Kahneman’s work has garnered widespread praise, the field of behavioral finance is still largely in its developmental phases.  In my experience, more and more financial professionals are trying to understand the field, but it’s still something that market practitioners as a whole are wrestling with and learning.  But we’re moving in the right direction.

Unfortunately, the thinking in both economics and finance is dominated by Efficient Market Hypothesis, rational expectations and other such thinking that is often used to disregard many of the important contributions of behavioralists.  In 2008, for a fleeting second, it appeared as though the Great Financial Crisis had struck a mortal wound in EMH and many of the economic theories that were well ground in this sort of thinking.  But they have come back with a vengeance and many appear to be clinging desperately to ideas of old.  I don’t know what it will take for more people to take behavioral finance seriously and assimilate it into their work, but I do think that day is coming.  Here’s to hoping it doesn’t take another 2008 style slap upside our economic head to get us there.

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