Do All Financial Economists Speak the Language of Positivism?

Abstract

Behavioral finance is a branch of finance that studies the impact of psychology on financial decision making and market behavior. It challenges the traditional finance approach, which assumes perfect information, rational decision making, and standard utility theory. Behavioral finance incorporates insights from psychology to explain deviations from traditional finance theories, such as why individuals act irrationally due to emotional and cognitive biases. Micro behavioral finance studies individual decision-making processes while macro behavioral finance examines market deviations from efficiency. Contemporary finance research combines both traditional finance and behavioral finance perspectives and often adopts a functionalist and positivist approach with econometric and statistical analysis. The positivist paradigm views science as a method to identify associations among variables and sees theories and variables as mere tools for testing but does not argue that they necessarily describe reality. The research includes a review of papers in the field of finance and focuses on the philosophical stance they have taken while conduction the research. The conclusion derived on the basis of that critical review are provided in the body of the paper and the commentary has been done.