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“Don't Discount Social and Cultural Factors:” Leading Scholars Meet at Fourth Behavioral Finance Conference

January 30, 2014
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by Richard Westlund

   
Pictured: David Hirshleifer, University of California at Irvine

David Hirshleifer believes traditional finance models are likely to miss the mark unless they include social and cultural factors.  "You can't use purely rational models to understand economics and finance," he told attendees at the School of Business Administration's Fourth Behavioral Finance Conference on Dec. 13-15.  "You have to look at individual and social preferences, values and beliefs, which vary across time and cultures."

Sponsored by the School’s Department of Finance and the Review of Financial Studies (RFS) and organized by Alok Kumar, Gabelli Asset Management Professor of Finance, the conference drew more than 50 leaders in this financial discipline. 

"Behavioral finance allows us to better understand the behavior of financial markets using a variety of methods and tools from other areas of social sciences such as psychology and sociology," Kumar said. "In particular, we can examine the behavior of individual decision makers to understand the aggregate behavior of the stock market and firms."

Recent years have witnessed a revolution in learning how individual behavior affects financial markets, added Douglas R. Emery, professor of finance,  Bank of America Scholar, and department chair. "The annual Miami Behavioral Finance Conference has quickly emerged as a leading forum for scholars on the forefront of this revolution to come together from all over the world to exchange ideas," he said.

In his keynote talk, "Social Economics and Finance," Hirshleifer, professor of finance and chair in business growth at University of California Irvine, said there are long-term cultural effects on taking risks and propensities to engage in transactions. For example, some cultures traditional value saving for the future, versus spending now.  On the firm level, culture can affect choices in capital structure, risk-taking ventures and the level of dividend payouts.

"However, it's important to remember that culture is also a living thing," he added. "Shifts in popular financial ideas can spread from person to person and cause booms, busts and other fluctuations in financial behavior."

Hirshleifer also outlined his recent research on the psychology of firms and markets, social transmissions of investment ideas, and the effect of emotions on asset prices. "We need deeper models that incorporate individual beliefs and ideas, as well as ideologies that affect popular thinking about financial issues," he said. "When we study economic behavior, we shouldn't leave out any of the drivers."

Summing up the significance of the three-day event, Kumar said, "Our annual behavioral finance conference has helped us improve the reputation of the finance department, the business school, and the university as a whole. The conference has given us a “buzz” that allows us to recruit faculty members from top finance PhD programs. Beyond the immediate benefits to the finance department, the interdisciplinary nature of the conference should help other departments, such as accounting, economics, and marketing."

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