ABSTRACT
For a discipline having individual choice as one of its fundamental tenets, finance pays surprisingly little attention to the individual. We all know that people value investments differently, because if they didn’t, there would be no financial market activity. But if in the long run on average people didn’t value investments correctly (and identically), whatever person didn’t would be out of the market. We believe in so-called “rational” financial models because we can’t believe that people can be very wrong for very long. From an economic standpoint “rational behavior” is a problematic concept, but from one common sense standpoint, with which the economic standpoint, whatever it may be, must be in agreement, “rational behavior” is “not consistently being wrong”. Of course the market is our measure of what is wrong, and the market is made up of people, but economic “fundamentals” ensure that the market itself cannot be very wrong for very long. Because economic fundamentals discipline the market which disciplines people, we can eliminate the individual from our models. Both rationality and the excision of the individual have received extensive critical commentary in the literature, but the argument against them has been largely based on their unreality. And this unreality is readily conceded; however, the common sense argument in their favor has thus far been too strong to yield to it. Using recent findings in cognitive science concerning images, this paper proposes a new concept of rationality and a new argument for the restoration of the individual in finance models.
