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The use of risk in understanding financial decisions and institutional uncertainty

  • Pixley, Jocelyn
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    The idea that rationality and emotional factors are involved in financial decisions is well accepted in many economic approaches and in organisation theory. This paper compares specific relevant arguments in behavioural finance and sociology. The aim is to show the implications of these different analyses for the financial sector. The question is whether behavioural finance emphasises the concept of risk more than uncertainty. The paper suggests that cognitive and emotional factors are usefully examined in light of approaches from both behavioural finance and sociology. The first looks at individuals primarily, the second at structural (policy and market) factors. I argue that the latter influence organisational choices of different time orientations towards the future. In exploring the potential of this approach, the paper poses three organisational decision models, that take uncertainty and its relevant social institutions into account, while acknowledging that time preferences and discounting by individuals are well-explored in behavioural economic frameworks.

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    Article provided by Elsevier in its journal Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics).

    Volume (Year): 39 (2010)
    Issue (Month): 2 (April)
    Pages: 209-222

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    Handle: RePEc:eee:soceco:v:39:y:2010:i:2:p:209-222
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620175

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    1. Matthew Rabin., 1997. "Psychology and Economics," Economics Working Papers 97-251, University of California at Berkeley.
    2. George Loewenstein, 2000. "Emotions in Economic Theory and Economic Behavior," American Economic Review, American Economic Association, vol. 90(2), pages 426-432, May.
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    4. Beckert, Jens, 2005. "The Moral Embeddedness of Markets," MPIfG Discussion Paper 05/6, Max Planck Institute for the Study of Societies.
    5. Andersson, Patric & Tour, Richard, 2005. "How to Sample Behavior and Emotions of Traders: A Psychological Approach and an Empirical Example," Sonderforschungsbereich 504 Publications 05-30, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    6. David Dequech, 1999. "Expectations and Confidence under Uncertainty," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 21(3), pages 415-430, April.
    7. Williamson, Oliver E, 1993. "Calculativeness, Trust, and Economic Organization," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 453-86, April.
    8. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
    9. Dequech, David, 2000. "Confidence and action: a comment on Barbalet," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 29(6), pages 503-515, November.
    10. Brad M. Barber & Terrance Odean, 2001. "Boys Will Be Boys: Gender, Overconfidence, And Common Stock Investment," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 261-292, February.
    11. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
    12. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
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