| Behavioral Finance is a relatively new field of inquiry in which findings from the behavioral sciences are integrated with the normative models of economics and finance in attempting to understand how investors make decisions. This study investigated the phenomenon of capital investing within this framework. It has been suggested that deviation from rational choice and subjective expected utility results from a number of cognitive biases that affect choice during the decision-making process (Olsen, 1998). In testing 6 hypotheses, it was proposed that Behavioral Finance will yield a deeper understanding of deviation from rationality by incorporating theory and findings from the Experimental Analysis of Behavior and Behavioral Ecology. Results generally supported expanding the paradigm as investors' choice patterns were affected by variables that are similar to those expected in common foraging problems faced by non-human foragers and by early hunter-gatherers. As opposed to the assumptions of rational choice, investors became risk-seeking when faced with expected returns that fell below a minimum financial goal and became risk-averse when expected returns exceeded a minimum goal. Choice reflected a pattern more indicative of adaptation that probably has developed over thousands of years via sensitivity to 3 parameters: (a) expected payoff of the available options, (b) the variability of possible outcomes, and (c) current needs or goals. Investors' choices deviated from the normative models derived in the 19th century but were consistent with models that have proven to be adaptive and functional in an uncertain natural environment over millennia. Despite the seemingly adaptive nature of behavior constrained by these three parameters, deviation from choice patterns directed at long-term success of capital projects were observed when investors were presented concurrently available, more proximal contingencies for their choices, a phenomenon predicted by models derived from the experimental analysis of behavior. Practical implications and the utility of expanding the Behavioral Finance Paradigm are discussed. |
