Are investors rational, irrational or normal?


  • Md Al Mamun Department of Economics and Finance, La Trobe University, VIC 3073, Australia.
  • Md. Abu Syeed Research Assistant, Department of Business Administration, East West University, Bangladesh.
  • Farida Yasmeen Research Assistant, Department of Business Administration, East West University, Bangladesh.



Behavioral finance, Efficient market hypothesis, Investor’s rationality, Investor’s irrationality.


The nature of investor’s rationality vs. irrationality debate drawn attention of thousands of academic papers, hundreds of conferences, roundtables discussion leading to two ends: the classical theorist i.e. the proponents of efficient market hypothesis (EMH) and the behaviorist. From Fisher’s (1906) Nature of Capital & Income to Ross (1977); investor’s rationality has been considered as the principal assumption in the development of theoretical finance. Unfortunately though, various studies have shown repeated form of investor’s irrationality and incompetence in their decision process. Even the very proponents of EMH, Fama (1965) has later on in 1993 advocated the lack of market efficiency! Indeed the story of black Monday in the USA to the global financial tsunami (2007-2012) has put the proponents of EMH into the cluelessness. While, the behaviorists argument that the financial markets can be best understood by studying the psychology is also subject to criticism that there will be no existence of standard models to study agent’s behavior in the market! Therefore, this study aims at finding out the true scenarios of investor’s behavior by working on 200 individual investors in Dhaka Stock Exchange (DSE). Investors’ response to different questions relating to fundamental assumption of “rationality’ or ‘presence of irrationality." The result shows a complete absence of the assumption of rationality or irrationality in number of critical issues. Therefore, the idea of EMH or mere psychologically driven behavioral finance should become less acknowledgeable in understanding the agents of financial market i.e. the investors. Rather a combination of these two may give more insight in understanding the investor’s behavior in the financial market.


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