Behavioral research: What the theories say

Behavioral issues cast doubt on the theses based on the assumption of rationality and efficiency. Homo economicus wisdom had served as a yardstick for all the economic judgments until behavioral research emerged. It mandates a mindset of perfect rationality. Accordingly, economic agents are expected to continuously make the best decisions available, when dealing with an economic transaction or evaluating and, hence making an investment. According to behavioral research, this may not always be the case. Behavioral research mainly argues that economic theories that work under rationality assumption fail to explain certain unusual situations that are observed in the markets in the real world. This paper suggests that by understanding the logic of behavioral research, one can better control and hence govern the price and valuation anomalies these situations give rise to. The paper also suggests that as long as international financial principles are duly implemented, one would be, a priori, able to prevent, or at least minimize the effects of, some of these pricing anomalies. We therefore investigate the theoretical literature on behavioral research that sheds light on the caveats of the approaches with perfect efficiency arguments.