Behavioral Economics from the Perspective of the Participation Finance System

Behavioral economics expresses that individuals do not always make decisions within the framework of rational thought processes with the purpose of maximizing their own benefits. In line with this theory, irrational behaviors and thoughts, beliefs, and prejudices can directly affect many decisions taken by individuals.

Behavioral Economics from the Perspective of the Participation Finance System

Traditional economic theories exclude the psychological and sociological factors related to the decision-making process of the individual. In the most general terms, behavioral economics is a field that investigates the effects of a number of internal and external psychological factors on the relevant process, apart from figures, in the decision-making process of individuals with the cause-effect relationship. 

The Development Process of Behavioral Economics

The birth of behavioral economics is attributed to the work of Adam Smith titled The Theory of Moral Sentiments, which he prepared in 1759. Smith grounds this study on the proposition that people's decisions are influenced by external factors as well as their impulses to meet their personal benefits. Adam Smith emphasized that the most important factor that shapes human behavior is the desire to gain sympathy. In other words, Smith indicates that people need praise, acknowledgment, and approval since they are social beings. 

Afterward, researches and analysis on the correlation between psychological behaviors and the economy have achieved further depth through the acceleration of technological developments. Administrative Behavior, published by Herbert Simon in 1947, and X-Inefficiency, written by Harvey Leibenstein in 1966, are the main studies in the field of behavioral economics. Their studies in behavioral economics brought the Nobel Prize in Economics to Simon in 1978, Daniel Kahneman in 2002, and Richard Thaler in 2017.

Subject and Methodology of Behavioral Economics

According to the basic theses of behavioral economics, it is not possible for individuals to act independently of their beliefs, feelings, prejudices, and intuitions by using only mathematical reasoning in all their economic choices. Because financial actions of people are a complex process that cannot be neutralized from social and psychological effects Relationships, impulses, and religious beliefs that form the basis of society are positioned differently from the world built by mainstream economics. 

Completely isolating the individual from society and assuming a selfish, purely utility-maximizing definition will leave our understanding of the economic behavior of the individual incomplete. 

Participation Finance System and Behavioral Economics

Participation Finance systematics puts forward new solutions to the issues that traditional finance paradigms lack, as in the field of behavioral finance, and presents an important functionality in order to ensure the efficiency and continuity of financial markets.

 The Participation Finance System states that individuals do not act with purely rational behavior patterns, which is also the field of study of the behavioral finance discipline, and that the financial preferences, beliefs, subconsciousness, and emotions of the individuals are also effective in this regard. It ignores the point of view that perceives people only as beings that aim to maximize their interests and highlights the human characteristics and values of the individual.

When the previous studies on the subject are analyzed, it is seen that the Participation Finance System and behavioral economics intersect on some assumptions and that much more efficient methodologies will be set forth by considering these together. From this point of view, it would be beneficial to synthesize the findings of behavioral economics in the studies to be carried out in order to reveal the awareness of the Participation Finance system.  It is essential to raise more awareness in order for the Participation Finance System to achieve the value it deserves. In this respect, the Participation Finance system will provide more added value to economic development with its existing features in its structure and will enable the creation of a financial systematics that is much more resistant to potential crises. 

İbrahim Gökburun

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