Authors: Angela Ambrosino, Paolo Pietro Biancone
In the past two decades a group of leading scholars in law and economics, such as Cass R. Sunstein, Christine Jolls, Richard Thaler (1998), have conducted a wide-ranging debate on the validity of the perfect rationality assumption for inquiry in the field. This debate has led to the development of what is now known as the behavioral approach to law and economics. By sharing tools and theoretical results derived from behavioral economics, the aim of this approach is to develop normative models through which the legislator can shape new norms both to avert biased behavior and to make people eliminate biases from their own behavior (debiasing law and debiasing through law, Jolls and Sunstain, 2006).
The debate has been recently enriched by Gregory Mitchell’s contribution. His main research interests are law and psychology. The main criticism that he brings against the behavioral approach to law and economics and more generally to behavioral economics (2002a, 2002b, 2003a, 2003b) is that much of the scholarship within the field describes the psychological research that it uses as if it provides general laws of thought and behavior rather than insights conditional on the setting, on the characteristics of subjects, and on the specificity of the task at hand.
Mitchell describes a new path of inquiry in which heterogeneity is the core of any investigation in economic human behavior. He shares the aims and the scope of cognitive economics (Ambrosino, 2006, 2009, 2010) and provide new tools to develop the inquiry into the field of legal theory (Ambrosino, 2012b).
This paper will suggest that Mitchell’s idea of a contextualist approach that seeks to identify the specific conditions under which irrational behavior occurs and to understand when and how it can be remedied can be of particular relevance in the development of a cognitive analysis of financial markets and financial decision making processes.
At the end of the last century the results obtained by the behavioral approach to economics started being included into financial economics. The idea was that some financial phenomena can be better described by models in which agents are not fully rational. Hence behavioral finance referred to the same main literature applied by behavioral economics and behavioral law and economics (Kahneman and Tversky, 1979, Shefrin and Statman, 1985; Camerer and Lovallo, 1999; Haevey, 1997; Juslin, 1994; Bell, 1982; Loomes e Sudgen; 1982).
Under the perspective of cognitive economics, behavioral finance shares the same limits of behavioral economics and behavioral law and economics (Ambrosino 2010, 2012 a, 2012b; Spada and Rizzello, 2012) and gives too much room to prediction in its models. This paper will argue that following Mitchell’s contextualist approach also financial economics can gain in terms of a better comprehension of financial markets and decision making processes.
Keywords: cognitive economics, cognitive legal theory, cognitive finance, Mitchell