Toward a theory of behavioral finance: implications from the natural sciences

Purpose – The purpose of this paper is to identify common inclusive concepts that might help define the boundaries of a general theory of behavioral finance. Design/methodology/approach – A cross disciplinary review of relevant natural and social sciences is conducted to identify common foundational concepts. Findings – The overall findings are that a general theory must include assumptions of subjective perception, indeterminacy, and a financial decision process that is both logical and affective. Practical implications – Optimal financial decisions are not possible and significant market unpredictability will continue because of the dynamic complexity associated with disequilibrium. Social implications – The current financial paradigm is based upon radically incorrect assumptions and a general theory of behavioral finance cannot arise from minor corrections to the current financial paradigm. Originality/value – This paper is the first to attempt identifying foundational attributes of a behavioral financial paradigm.