Review of Behavioral Economics > Vol 6 > Issue 1

Classical Behavioural Finance Theory

K. Vela Velupillai, Solna, Sweden,
Suggested Citation
K. Vela Velupillai (2019), "Classical Behavioural Finance Theory", Review of Behavioral Economics: Vol. 6: No. 1, pp 1-18.

Publication Date: 26 Feb 2019
© 2019 K. Vela Velupillai
Behavioral Finance,  Bounded Rationality,  Heuristics,  Computable
JEL Codes: C63C64D83G02
Finance theorybehavioural financearithmetic gameseconophysicsclassical behavioural finance theory


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In this article:
1. Introductory Quasi-Historical Notes 
2. Theorems, Corollories, a Thesis, a Definition and Remarks 
3. Heuristics as a Basis for CBFT in Human Problem Solving 
4. Vistas for a Future for CBFT 


Behavioural Finance Theory is a modern approach to finance theory – which, in turn has three wings in its standard versions: the theory of finance based on subjective expected utility theory, in conjunction with the efficient market hypothesis theory (with Bayes’s rule as an auxiliary assumption for updates); the Shafer-Vovk approach via the use of Ville’s arithmetic game version; and that which is based on the work of Bachelier, Osborne and Mandelbrot which is called the Econophysics vision. Dissatisfaction with the theoretical, empirical and experimental fundamentals of these three approaches has led, in the last quarter of a century, to the development of the field of modern behavioural finance theory. This is based on the early work of Thaler, Tversky and Kahneman. In this paper, this view is contrasted with the prior work of Herbert Simon, and is called Classical Behavioural Finance Theory.