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Who were the key figures working on psychological dimensions of financial markets before Kahneman and Tversky’s work became dominant in the 1980s?

Every literature review starts with Prospect Theory, but I know earlier scholars were asking similar questions about investor behavior, market psychology, and deviations from rationality. I'm trying to recover that earlier tradition people working in the 1950s through 1970s who didn't have the label "behavioral finance" but were clearly its intellectual precursors. Who should I be reading and citing?

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By Heena Answered 1 month ago

Well before Kahneman and Tversky, several thinkers laid the groundwork for behavioral finance. Gustave Le Bon’s The Crowd (1895) explored herd behavior, while John Maynard Keynes introduced the idea of “animal spirits” in The General Theory (1936). Early empirical insights also came from Barber and Odean’s studies on investor behavior. However, George Katona’s Human Behavior in the Uncertainty of the Stock Market (1951) and later Psychological Economics are often seen as the first systematic attempts to integrate psychology into economic decision-making.

By Bhagirathi Bisht Answered 1 month ago

I've spent time in the archives on this exact question. The easy answer is Herbert Simon's work on bounded rationality in the 1950s absolutely foundational. But I would also direct you to Oskar Morgenstern, who alongside von Neumann, was already questioning perfect foresight in his 1935 work on economic prediction. Then there's George Katona at Michigan, doing empirical surveys of consumer sentiment in the 1940s and 50s, measuring psychological expectations directly. And Paul Lazarsfeld's work on decision processes. These scholars created the intellectual scaffolding the critique of omniscience, the empirical turn toward actual behavior upon which Kahneman and Tversky later built their elegant experimental framework.

 

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