From Standard Finance to the Third Generation of Behavioral Finance

Standard finance describes people as computer-like “rational,” aiming at maximizing utilitarian wealth and immune to cognitive and emotional errors. 

The first generation of behavioral finance described people as bumbling “irrational,” aiming at maximizing utilitarian wealth, but hampered from striking it perfectly by cognitive and emotional errors.  

The second generation of behavioral finance described people as “normal,” neither rational nor irrational. Normal people aim for expressive and emotional benefits in addition to utilitarian ones.

The third generation of behavioral finance also describes people as “normal,” but is explicit in describing life well-being as people’s overall want. This generation broadens its lens to see people as whole persons and show them in the domain of finances, but also in the domains of family, friends, health, work, education, religion, and society.