Beyond Rationality: Exploring Neoclassical, Behavioral, and Austrian Approaches to Finance

Abstract

This paper compares neoclassical, behavioral, and Austrian perspectives on financial behavior, focusing on market conception, asset pricing, and portfolio organization. Neoclassicals emphasize efficient markets and risk-averse, diversified portfolios. Behavioral finance highlights psychological biases influencing investment decisions but overlooks the role of reflection and external economic factors. On the other hand, the Austrian perspective views markets as dynamic processes driven by rational human actions, where individuals learn and adapt. Austrians critique neoclassical reliance on historical data and the behavioral perspective’s overemphasis on biases, advocating for a subjective approach to asset valuation and portfolio design. The article argues for an Austrian investment theory, emphasizing purposeful actions, learning, and individual judgment under uncertainty, contrasting with the static neoclassical and behavioral finance models. This work contributes to a systematic framework for comparing these schools and offers a new critique of behavioral finance from an Austrian perspective.