Essay: Traditional Financial Models

Sample Essay

The last theme outlined in the article is overreaction which compares different interpretations under traditional theories and behavioral theories. Olsen at the end of the article explains that change is necessary in traditional financial models and themes and as human behavior does not tend to correct itself, external factors have to be implemented in order to change human behavior so rational decisions can be made. He suggests that peer reviews and journals are an excellent way to convey information to audience especially to individuals who are just starting their careers in finance (Olsen, 2008).

Olsen argues that cognitive dissonance causes problems or behavioral finance in decision making as most of the practitioners apply traditional theories of finance based on their personal belief and perceptions. He suggests that this practice needs to be changed and more emphasis should be placed on behavioral finance rather than traditional theories. This argument though seems logical but research has shown that managers who relied on traditional theories in decision making outperformed markets by a much larger percentage than managers who based their decisions on flexible theories (Faugere, Shawky, & Smith, 2004).

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