<p>I cannot answer much, but I think you could explore the work of Andrew Lo. He worked a lot on this subject, trying to reconcile &quot;rational&quot; and &quot;irrational&quot; behaviours in the field of finance. In his article <em>Fear and Greed in Financial Markets: A Clinical Study of Day-Traders</em>, Lo associate rationality with a lesser degree of emotional reaction, and irrationality with higher emotionality (Lo 2005). This method, based on the measurement of emotionality, is inspired from works demonstrating that a lesser degree of emotional reaction leads to better trading results (Vohra 2018). Other methods would be to measure the degree of risk aversion through questionnaires (Bertelli 2017) or to measure the degree of confidence (Schiller 2010)(over confidence is a significant biais in finance, so it can be a good measure of irrational behaviours).</p>
<p><strong>References</strong></p>
<p>Bertelli. 2017. &quot;Doctor Jekyll and Mr. Hyde: Stress Testing of Investor Behavior&quot;. In Handbook of Investors' Behavior During Financial Crises, edited by Fotini Economou, Konstantinos Gavriilidis, Greg N. Gregoriou, Vasileios Kallinterakis.</p>
<p>Lo, A. W., Repin, D. V., &amp; Steenbarger, B. N. (2005). COGNITIVE NEUROSCIENTIFIC FOUNDATIONS OF ECONOMIC BEHAVIOR[dagger]: Fear and greed in financial markets: A clinical study of day-traders. The American Economic Review, 95(2), 352-359.</p>
<p>Robert J. Shiller (2000) Measuring Bubble Expectations and Investor Confidence, Journal of Psychology and Financial Markets, 1:1, 49-60, DOI: 10.1207/S15327760JPFM0101_05</p>
<p>Vohra, S. (2018), &quot;Interpersonal Emotion Regulation in the Work of Financial Traders&quot;, Individual, Relational, and Contextual Dynamics of Emotions (Research on Emotion in Organizations, Vol. 14), Emerald Publishing Limited, Bingley, pp. 97-118. <a href="https://doi.org/10.1108/S1746-979120180000014013" rel="nofollow noreferrer">https://doi.org/10.1108/S1746-979120180000014013</a></p>

CC BY-SA 4.0
2021-12-12T14:29:05.633Z
2021-12-12T14:29:05.633Z
Alexandre Michaud
<p>Can anyone advise me how to measure an investor's rationality using numbers (indexes for example) in the investment decision? I would like to study this, but I don't know what methodology to adopt to collect and analyze my data.
Thanks</p>
<p>Auby</p>

CC BY-SA 4.0
2021-12-12T01:53:43.043Z
Please edit the question to limit it to a specific problem with enough detail to identify an adequate answer.
Community
CC BY-SA 4.0
2021-12-14T07:25:33.047Z
Although not a formal mathematical definition, the simplest definition of rationality in economics would be that you understand your preferences and you can engage in behavior that will subjectively improve your sense of well-being while being constrained by any obligations, your budget and any physical laws such as gravity. (continued)
Dave Harris
CC BY-SA 4.0
2021-12-14T07:27:59.787Z
To be rational in this way of thinking, then you can rank things, such as investments and you know their prices or at least the price you would pay. For example, I had a customer that bought investments based on the picture on the stock certificate.  She loved Disney stock.  That is rational behavior.  Economics does not tell you what to prefer, how or why.  It only cares that you can identify, rank items, gather prices, be aware of your constraints, and be capable of acting.
Dave Harris
CC BY-SA 4.0
2021-12-14T07:32:17.797Z
The first thing you need to do is gather a definition and create a model of what you mean by rationality.  There are a variety of definitions.  Most financial economics models do not fully consider the entire possible list of ranking methods.  No model exists to consider the picture on the certificate as important.  People have worked on this problem since the beginning of the 20th century.  You need to tell us more in your question.  It is too vague.
Dave Harris
CC BY-SA 4.0
2021-12-14T07:33:00.077Z
You should begin with a set of basic books on utility theory and the controversies on it.  We do not know what books you have already read.
Dave Harris
<financial-economics>
Rational and behavioral decision in finance investment
Auby
# Rational and behavioral decision in finance investment

(Asked by: username_0 on 2021-12-11)

Can anyone advise me how to measure an investor's rationality using numbers (indexes for example) in the investment decision? I would like to study this, but I don't know what methodology to adopt to collect and analyze my data.
Thanks

Auby

**Tags:** financial-economics
> **Comments:**
> **username_1**: Please edit the question to limit it to a specific problem with enough detail to identify an adequate answer.  
> **username_2**: Although not a formal mathematical definition, the simplest definition of rationality in economics would be that you understand your preferences and you can engage in behavior that will subjectively improve your sense of well-being while being constrained by any obligations, your budget and any physical laws such as gravity. (continued)  
> **username_2**: To be rational in this way of thinking, then you can rank things, such as investments and you know their prices or at least the price you would pay. For example, I had a customer that bought investments based on the picture on the stock certificate.  She loved Disney stock.  That is rational behavior.  Economics does not tell you what to prefer, how or why.  It only cares that you can identify, rank items, gather prices, be aware of your constraints, and be capable of acting.  
> **username_2**: The first thing you need to do is gather a definition and create a model of what you mean by rationality.  There are a variety of definitions.  Most financial economics models do not fully consider the entire possible list of ranking methods.  No model exists to consider the picture on the certificate as important.  People have worked on this problem since the beginning of the 20th century.  You need to tell us more in your question.  It is too vague.  
> **username_2**: You should begin with a set of basic books on utility theory and the controversies on it.  We do not know what books you have already read.  

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## 1 answers

### Answer by username_3 on 2021-12-12. Score: 1

I cannot answer much, but I think you could explore the work of Andrew Lo. He worked a lot on this subject, trying to reconcile "rational" and "irrational" behaviours in the field of finance. In his article *Fear and Greed in Financial Markets: A Clinical Study of Day-Traders*, Lo associate rationality with a lesser degree of emotional reaction, and irrationality with higher emotionality (Lo 2005). This method, based on the measurement of emotionality, is inspired from works demonstrating that a lesser degree of emotional reaction leads to better trading results (Vohra 2018). Other methods would be to measure the degree of risk aversion through questionnaires (Bertelli 2017) or to measure the degree of confidence (Schiller 2010)(over confidence is a significant biais in finance, so it can be a good measure of irrational behaviours).

**References**

Bertelli. 2017. "Doctor Jekyll and Mr. Hyde: Stress Testing of Investor Behavior". In Handbook of Investors' Behavior During Financial Crises, edited by Fotini Economou, Konstantinos Gavriilidis, Greg N. Gregoriou, Vasileios Kallinterakis.

Lo, A. W., Repin, D. V., & Steenbarger, B. N. (2005). COGNITIVE NEUROSCIENTIFIC FOUNDATIONS OF ECONOMIC BEHAVIOR[dagger]: Fear and greed in financial markets: A clinical study of day-traders. The American Economic Review, 95(2), 352-359.

Robert J. Shiller (2000) Measuring Bubble Expectations and Investor Confidence, Journal of Psychology and Financial Markets, 1:1, 49-60, DOI: 10.1207/S15327760JPFM0101\_05

Vohra, S. (2018), "Interpersonal Emotion Regulation in the Work of Financial Traders", Individual, Relational, and Contextual Dynamics of Emotions (Research on Emotion in Organizations, Vol. 14), Emerald Publishing Limited, Bingley, pp. 97-118. <https://doi.org/10.1108/S1746-979120180000014013>


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