An Entropy Theory of Psychology and its Implication to Behavioral Finance

Abstract:     
Most of the theories in behavioral finance rely on some kind of psychological biases. However, the potentially boundless set of psychological biases that theorists can use to build behavioral models and explain observed phenomena creates the potential for "theory dredging." We develop a unified theory of human psychology based on entropy law, the most universal natural law. This unified theory of human psychology will help us determine whether patterns discussed in the finance literature are genuine or the result of data mining. It will also greatly reduce the possibility of "theory dredging" in the future works on behavioral finance.

Number of Pages in PDF File: 11

Keywords: entropy, psychology, information, Behavioral Finance

JEL Classification: G14

working papers series