Which heuristics can aid financial-decision-making?

Forbes, William; Hudson, Robert; Skerratt, Len; Soufian, Mona

Abstract

© 2015 Elsevier Inc. We evaluate the contribution of Nobel Prize-winner Daniel Kahneman, often in association with his late co-author Amos Tversky, to the development of our understanding of financial decision-making and the evolution of behavioural finance as a school of thought within Finance. Whilst a general evaluation of the work of Kahneman would be a massive task, we constrain ourselves to a more narrow discussion of his vision of financial-decision making compared to a possible alternative advanced by Gerd Gigerenzer along with numerous co-authors. Both Kahneman and Gigerenzer agree on the centrality of heuristics in decision making. However, for Kahneman heuristics often appear as a fall back when the standard von-Neumann-Morgenstern axioms of rational decision-making do not describe investors' choices. In contrast, for Gigerenzer heuristics are simply a more effective way of evaluating choices in the rich and changing decision making environment investors must face. Gigerenzer challenges Kahneman to move beyond substantiating the presence of heuristics towards a more tangible, testable, description of their use and disposal within the ever changing decision-making environment financial agents inhabit. Here we see the emphasis placed by Gigerenzer on how context and cognition interact to form new schemata for fast and frugal reasoning as offering a productive vein of new research. We illustrate how the interaction between cognition and context already characterises much empirical research and it appears the fast and frugal reasoning perspective of Gigerenzer can provide a framework to enhance our understanding of how financial decisions are made.

Citation

Forbes, W., Hudson, R., Skerratt, L., & Soufian, M. (2015). Which heuristics can aid financial-decision-making?. International review of financial analysis, 42(December), 199-210. https://doi.org/10.1016/j.irfa.2015.07.002

• Journal Article Type: Article
• Acceptance Date: Jul 6, 2015
• Online Publication Date: Jul 26, 2015
• Publication Date: 2015-12
• Deposit Date: Jul 29, 2015
• Publicly Available Date: Jul 29, 2015
• Journal: International review of financial analysis
• Print ISSN: 1057-5219
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 42
• Issue: December
• Pages: 199-210
• DOI: https://doi.org/10.1016/j.irfa.2015.07.002
• Keywords: Heuristics, Behavioural finance, Decision making, Cognition
• Public URL: https://hull-repository.worktribe.com/output/377071
• Publisher URL: http://www.sciencedirect.com/science/article/pii/S1057521915001295
• Additional Information: This article is maintained by: Elsevier; Article Title: Which heuristics can aid financial-decision-making?; Journal Title: International Review of Financial Analysis; CrossRef DOI link to publisher maintained version: http://dx.doi.org/10.1016/j.irfa.2015.07.002; Content Type: article; Copyright: Copyright © 2015 Elsevier Inc. All rights reserved.