An Overview of Behavioral Finance and Revisiting

the Behavioral Life Cycle Hypothesis

Yasmine H Abdel Razek*

This paper attempts to introduce an overview of the field of behavioral finance, its building blocks and
how it relates to the traditional mainstream finance discipline. In addition, it revisits the behavioral life
cycle model that is based on the traditional life cycle model. The point of introducing this model is to
show that behavioral finance and traditional finance should not be always at war. They could actually
complement each other and produce eventually modified models with enhanced predictive power.

Introduction
Investment and financing decisions are perplexing decisions that keep changing according
to the surrounding circumstances and conditions. No matter how much we study them
or for how long, they remain partially mysterious and at some points in time
unpredictable. That is directly related to the fact that they involve a human aspect into
them. And as much as the human brain is fascinating to neurologists and the decision
making is amazing to psychologists, so will be the investment and financing decisions to
finance academics and professionals.
This necessitated a new vision to the finance discipline, a more open and
comprehensive one, a vision that encompasses many other scientific disciplines that
directly affect the way we judge and evaluate things. Finance has always been regarded as
an outgrowth of economics, a fact that cannot be denied. But ever since its inception it
has put focus into areas that were less tapped by economists and has followed a different
methodological perspective. According to Ross (1987), finance uses the modeling
framework constructed in economics, but within this framework, finance has taken a
different methodological perspective. It is not very accurate to characterize finance as
simply another of the specialty areas of economics. While finance is specialized in its focus
on financial markets, the difference between economics and finance only begins there.
The principal distinction is one of methodology rather than focus. He further explains
that in finance, the data are voluminous and of high quality and there is always a premium
on modeling close to the data. This, in turn, leads to models whose variables are
themselves observables rather than abstraction of classes of observables.
According to Wesley Clair Mitchell, all social sciences have a common aim, which is
the understanding of human behavior; a common method, which is the quantitative
analysis of behavior records; and a common aspiration, which is to devise ways of
experimenting upon behavior (Mills, 1999).

* An Adjunct Faculty of Finance, Management Department, The American University in Cairo.

E-mail: yasmin@aucegypt.edu

An Overview
© 2011 of Behavioral
IUP. All Finance and Revisiting the Behavioral Life Cycle Hypothesis
Rights Reserved. 7