Toward a theory of behavioral finance: implications from the natural sciences

Purpose The purpose of this paper is to identify common inclusive concepts that might help define the boundaries of a general theory of behavioral finance. Design/methodology/approach A cross disciplinary review of relevant natural and social sciences is conducted to identify common foundational concepts. Findings The overall findings are that a general theory must include assumptions of subjective perception, indeterminacy, and a financial decision process that is both logical and affective. Practical implications Optimal financial decisions are not possible and significant market unpredictability will continue because of the dynamic complexity associated with disequilibrium. Social implications The current financial paradigm is based upon radically incorrect assumptions and a general theory of behavioral finance cannot arise from minor corrections to the current financial paradigm. Originality/value This paper is the first to attempt identifying foundational attributes of a behavioral financial paradigm.