Behavioral Finance

In the context of diversification of knowledge in finance (Schinckus, 2008), behavioral finance is a new approach which studies the financial reality by taking into account the psychological dimension of investment. In the past 30 years, neoclassical finance and its masterpieces 1  have been challenged by empirical evidence and psychological studies. 2 Progressively, behavioral finance has become a strong alternative framework to neoclassical finance and some authors (Thaler, 1999) do not hesitate to present this field as the future main paradigm of financial economics.

Behavioral Finance

The emergence of the behavioral approach in finance is generally dated back to the 1980s (Schinckus, 2009), but a few papers are dedicated to the presentation of the investors’ behavioral analysis developed in the first part of the 20 th  century. In their book entitled, The Story of Behavioral Finance, Adams and Finn (2006) date the emergence of this paradigm in the 1980s as the result of a convergence of the advances in psychology and financial economics. Schleifer (2002, p. vi) explains that when he was a graduate student in the 1980s, “there were only a handful of academic papers in behavioral finance written by people like Robert Shiller, Larry Summers and Richard Thaller”. According to Shefrin (2002, p. 7), behavioral finance burgeoned when the advances made by psychologists came to the attention of the economists. The author claims that we had to wait until the 1980s to have, in finance, a true behavioral perspective founded on an organized body of knowledge.

Behavioral Finance in economic

The behavioral approach is not new in economics, it refers to the roots of the discipline when Adam Smith, father of economics, wrote a book titled, The Theory of Moral Sentiments. Before the emergence of psychology as a specific field of knowledge, economists appeared sometimes as psychologists of their time. Behavioral dimension always existed in economics and caused some ‘severe tumults’ in the history of economics (Lewin, 1996). Since the beginning of the 20 th  century, economists and psychologists have joined their critics to integrate the advances in psychology into economics. 3  Nowadays, behavioral economics is a well-known theoretical framework whose foundations and history have been the subject of a lot of research. In literature, behavioral economics is now presented as a paradigm whose emergence dates back to the 1950s with the works of Katona (1951) and Simon (1955).

Although some pioneers (Allais, 1953 or Ellsberg, 1961) of behavioral finance are wellknown to financial economists, the emergence of this new financial field is often dated back to the 1980s and a few contributions have been written about the possible historical roots of this field before the 1950s.

The objective of this paper is to propose a historical analysis of behavioral finance by presenting the conditions for the emergence of a more psychological finance and its historical roots that existed before the 1950s. Archeology refers to the origin of human cultures for which we have no or a few written records and, in line with this objective, we enhanced some historical elements of a behavioral approach in finance that pre-existed to finance as a discipline.

After having been reminded of the events that favored the emergence of behavioral finance and made the behavioral approach different from a behaviorist approach, we present psychological, economic and financial origins of behavioral finance. We then show that some theoretical developments in the 1920s were favorable for the emergence of behavioral finance. Finally, we will identify Keynes and Graham as the pioneers of behavioral finance.