Behavioral Finance

The only purpose of posting this piece is to save a link to an interview of Richard Thaler - Professor of Economics and Behavioral Science at Graduate School of Business , University of Chicago. He says "Well, we're humans, and we're busy. Life is complicated, and getting more complicated. We mentioned the term behavioral economics and people might wonder what that is. It's a field that only exists because regular economics is based on an idealized economic agent, sometimes called Homo Economicus. In the book we refer to such creatures as Econs. Econs are creatures that can calculate like a super computer, never get tempted by fatty or sweet foods, never get distracted, and probably aren't a whole lot of fun to be around. In contrast, real people, who in the book we call humans, don't make any appearance in standard economics. Behavioral economics is economics about humans. Humans are busy, can't solve every problem instantaneously, and get tempted by luscious desserts. Sometimes they need some help."

Quran describes the nature of human beings in Ayat 19-21 of Sura Al-Ma'arij

1. Truly man was created very impatient

2. Fretful when evil touches him;

3. And niggardly when good reaches him

So to speak in terms of behavioral finance, the human beings are irrational by nature and can't be expected to be rational in their decisions, if left to follow their natural instincts. These instincts or behaviors can be changed so as to behave rationally.

Again Quran provides the solution in Ayat 22-35 of Sura Al-Ma'arij

1. Not so those devoted to Prayer

2. Those who remain steadfast to their prayer;

3. And those in whose wealth is a recognized right

4. For the (needy) who asks and him who is prevented (for some reason from asking);

5. And those who hold to the truth of the Day of Judgment;

6. And those who fear the displeasure of their Lord

7. For their Lord's displeasure is the opposite of Peace and Tranquillity

8. And those who guard their chastity

9. Except with their wives and the (captives) whom their right hands possess for (then) they are not to be blamed

10.But those who trespass beyond this are transgressors

11.And those who respect their trusts and covenants;

12.And those who stand firm in their testimonies;

13.And those who guard (the sacredness) of their worship

14.Such will be the honored ones in the Gardens of (Bliss).