Neuroeconomics and Financial Decisions

Traditional economics assumes that we, humans, are consistently rational, selfish agents, capable of complex calculations that maximize utility as consumers and profits as producers of goods and services. Yet, casual observation tells us that this may not always be the case. People trade shares on stock exchanges differently depending on the level of hormones in their body, financial analysts make different recommendations about shares depending on the weather, stock markets yield positive abnormal returns when home football teams win. People also often make mistake in reasoning, evaluating and remembering the state of the world around simply because they ignore contrary objective information available to them. They hold losing shares too long and sell winning shares too soon. They use heuristics, not complex calculations when making decisions, they frame their thinking depending on the context, ignore the easy-to-use discounting calculations in favour of hyperbolic discounting despite the fact that the resulting numbers often do not make sense even to a person not familiar with finance. Companies of course, humans in them) appoint CEOs in part based on their looks despite patchy evidence of their superior returns. All these examples inform us that we must look beyond mathematical formulas to describe the complex world around us, including in finance, accounting, financial statement analysis, and other branches of economics and business. Neuroeconomics helps us direct this search.