Behavioral Rationality in Finance: The Case of Dividends

As the title suggests, this paper attempts to get to the specifics of the behavioral rationality theme of this conference by focusing on an area in the main core of finance, namely, the demand and supply of dividends, where, by common consent, the essentially rationalist of the field seems to be limping most noticeably. Important and pervasive behavior patterns on both the paying and the receiving ends have despairingly been written off as puzzles even by theorists as redoubtable as Fischer Black (see esp. his much-cited 1976 article). Behaviorists have homed in on precisely these same dividendrelated soft spots in the current body of theory (see esp. Shefrin and Statman 1984). We seem to have, in sum, an ideal place to look for signs of an imminent paradigm shift in the behavioral direction of precisely the kind envisioned by some of the other contributors to this conference. The dividend-related difficulties and supposed anomalies at issue here are more than just the parochial concern of finance specialists. The Dividends seem a natural area in finance where the introduction of behavioral/cognitive elements might help resolve long-standing anomalies, particularly the seeming failure of supply to adjust to taxinduced price penalties. A closer look at the empirical record, however-particularly at evidence of responsiveness to major structural changes shows behavior of the aggregates to be less anomalous than conventional handwringing might suggest. Behavioral/cognitive elements, whatever they might contribute to the description of particular microdecisions, do not appear to be essential adjuncts to the basic finance model in the major, comparative static applications for which it was intended. * Helpful comments on an earlier version of this paper have been received from Nai-fu Chen, Jean-Marie Gagnon, Gur Huberman, Kose John, James Poterba, and especially Melvin Reder.