These books are a very good starting point.

·         Misbehaving: The Making of Behavioural Economics Paperback, 2016 by Richard H Thaler

·         Behavioural Economics Saved My Dog: Life Advice For The Imperfect Human Paperback – 1 Oct 2015 by Dan Ariely

·         Thinking, Fast and Slow Paperback – 10 May 2012 by Daniel Kahneman

·         A Course in Behavioral Economics 2e Paperback – 11 Jan 2016 by Erik Angner

·         Rationality in Economics: Constructivist and Ecological Forms by Vernon L. Smith

·         Rationality in Economics Hardcover – 7 Sep 1989  by HARGREAVES-HEAP

Dear Dr Dhani,

Although the question above is out of the scope of my economic understanding, I believe that is possible to discuss the subject under the scope of investors because all of the humans have to make economic decision along their lives. Decisions from their own life or to make decision about their company – either small company or big company. First, we have a proverb from the statistical point of view that said “No chain is stronger than their weak ring” or weak link in economics. In one of my paper about Stevia, you can have access to the figure of the barrel where investor can replace the production traits, in the barrel, by economics traits. Large companies may have a department of quality control, and this team may decide where will be the weakest link in the moment of decision after in-depth analysis of influential factors. In our own life, we have to know about the factors that will have influence in our countries. For example: In more than 500 years, my country had in 2002 the first president with strong social commitment, and we had an arrangement in our economy suitable to make money and improve the life quality of most of the population. Thirty million of people leave the complete poverty. But, my country has a historical sequences of coups from which some presidents have been prevented to finish their terms. Thus, the rationality before the next coup is: what to do with the money that will be saved along this period of development. Some people bought cars, other travelled outside or inside the country. In both cases, the money vanished. The inflation that in the last coup reach 100% every month will be back, the social support has been cut and many workers has to retire because they are getting older. The problem is: how to survive when the researcher had a complete dedication to your ideas (technical, scientific, social and so on) which require complete dedication and strong economic institutions? How the company will survive if it bought fertilizer with dollars at $1.65 and now is paying the third installment with the dollar at $3.80, and the fertilizer was already sold with the dollar at $2.09. In this case only the CEO rationality will be able to avoid the bankruptcy of the company, or the citizen poverty. The initial decision has to be based on the country history, on the social arrangement of the population, and how every weak country has solved its problems. Only rationality can respond to these questions, otherwise, the current text could be not polite to our “partners”, but one thing is right: the link has to be made by the best computer in the world -- our brain. Best regards Walter.

A good research question. Generally all investment decisions are rational, I hope , since one's hard earned money s committed. Orgnisational decisions are are colored by top management commitment, social responsibility and individual decision framework. Sometimes political considerations influence investment i.e. where a road has to be built or on what route a fast train is to be introduced!

Human rationality is used to the extent of using available tools for decision making, and selective thinking of individuals on the same issues and constraints. However in the present social context one can say hat rationality is influenced by societal values and beliefs which are dynamic and ever changing.

Warm regards,

KRS

Hi! Check the following may give some idea. Good Luck!!!

Understanding Investor Behavior

http://www.investopedia.com/articles/05/032905.asp

The Efficient Markets Hypothesis

http://m.e-m-h.org/ClJM.pdf

The Behavioural Finance: A Challenge or Replacement to Efficient Market Concept

http://www.thesij.com/papers/IFBM/2014/August/IFBM-0206590202.pdf

Understanding Behavioral Aspects of Financial Planning and Investing

https://www.onefpa.org/journal/Pages/MAR15-Understanding-Behavioral-Aspects-of-Financial-Planning-and-Investing.aspx

BEHAVIORAL FINANCE, BOUNDED RATIONALITY, NEURO-FINANCE, AND TRADITIONAL FINANCE

http://businessperspectives.org/journals_free/imfi/2006/imfi_en_2006_04_Tseng.pdf

Efficient-market hypothesis

https://en.wikipedia.org/wiki/Efficient-market_hypothesis

Dear Dr. Dhani,

First off I would start with the fundamental assumptions of the EMH. Please note that there are many different versions of this. The most extreme is the so-called perfect competition. Another interesting theory is called complete markets. All of those have different assumptions.

Second, when we talk about rational investors, we must clearly define their utility function. During my research on capital structure transactions I constructed a microeconomical model which assumes a simple utility function calculated as the IRR of the expected cash flows resulting from the transaction.

However, one can go any number of levels deep in order to calibrate the utility function. E.g., in my model it would be trivially easy to construct a preference within the utility function which would additionally account for a gross cash-on-cash multiple from the investment, as well as the time required to exit the investment and the risk profile of the corporation's economical and financial performance.

I know this may all sound very abstract, but in order to construct a good theory one first needs to start with the assumptions and then validate them against microeconomical historical facts, as well as the legal and fInancial frameworks of the modern economy.

In case you wanted to discuss this on a more detailed level, I am always open for discussion.

To elaborate a little more: the previous post assumed rational investors. In such a setting, calculating their decisions is a simple optimization problem within their utility function parameters.

However, I just stumbled upon another angle for this problem: bounded rationality. With this assumption we don't view the investor as 100% rational, since there are many uncertainties and limitations involved in decision making (lack of resources and information, costs of analyzing data, time required for reaching a decision, etc.). Instead, in bounded-rationality setting the problem is solved by using heuristics instead of optimization.

Granted, a good model for bounded rationality would probably be much more complex than traditional rationality models. There's probably a need for stochastic processes for determining some bounded rationality parameters. Thus, heuristics may actually involve computations of a much higher-order complexity than solving for optimal outcomes. In my opinion, however, heuristic decision making is probably more factually accurate than the traditional optimization-rationality model.

 Dear Dr.Dhani,

The following articles might help you to discuss further on this.

• https://www.researchgate.net/publication/304656925_Implications_of_Heuristics_in_Financial_Decision_Making
• https://www.researchgate.net/publication/301636865_Behavioral_Influences_in_Investor_Decisions_-_An_Indian_Perspective?ev=prf_pub
• https://www.researchgate.net/publication/305329878_A_Study_on_Factors_Influencing_Buying_Behaviour_in_Indian_Stock_Markets?ev=prf_pub
• https://www.researchgate.net/publication/304780909_Prospect_Theory_Market_Forces_Investor_Satisfaction?ev=prf_pub

Article Implications of Heuristics in Financial Decision Making

Article Behavioral Influences in Investor Decisions – An Indian Perspective

Article A Study on Factors Influencing Buying Behaviour in Indian St...

Article Prospect Theory, Market Forces & Investor Satisfaction