Behavioral finance and Post Keynesian-institutionalist theories of financial markets

Abstract

The author of a paper in a previous issue of Journal of Post Keynesian Economics suggested that developments in behavioral finance might lead Post Keynesian economists to a new "general theory of financial behavior." We note that Post Keynesian-Institutionalist theories of financial markets have provided a "general theory" that has been repeatedly validated by recent real-world events from the stock market bubble and crash of 1987 to the current global financial crisis. After reviewing the psychological and institutional behavioral foundations of the Post Keynesian-Institutionalist theories that are rooted in the analyses of John Maynard Keynes, Paul Davidson, and John Kenneth Galbraith, we explain why developments in behavioral finance appear to have limited potential for making substantive contributions to those behavioral foundations.

Keywords:

• behavioral finance
• Davidson
• Galbraith
• Keynes
• nonergodic financial markets