ASSET PRICING AND FINANCIAL MARKETS: A COMPARISON BETWEEN CONVENTIONAL THEORY OF FINANCE, POST KEYNESIAN THEORY AND BEHAVIORAL FINANCE

Abstract

This paper aims, in its beginning, to present in a very short way how three schools of economic thought visualize financial markets and asset pricing. Next, the paper discusses the main differences between these schools, as well as its convergence points. We argue that many of the discordances in the perception of the role and the efficiency of financial markets are consequences of three basic questions: what is the main objective of economic agents in financial markets, how rational are their choices, and how important is the uncertainty in comparison with risk. Additionally, there are important differences about the questions proposed by each theory, which makes sometimes the object studied by each school diverse. We aim then, to evaluate the specific objectives of the three theories, as well as the impact of the realism of assumptions over the capacity to reach concrete results by each school. It is possible to verify that conventional finance, especially considering portfolio decision models, has considerable practical application, mainly for portfolio managers and investors. Post Keynesian theory, on the other hand, emphasizes the importance of psychological and behavioral issues on market operations, especially on speculative procedures. In this sense, Post Keynesian theory, together with behavioral finance theory, is more adherent to economic reality. However, because these assumptions create great complexity, the aptitude to deliver objective results departing from Post Keynesian models is considerable limited.