Academy of Accounting and Financial Studies Journal (Print ISSN: 1096-3685; Online ISSN: 1528-2635)

Research Article: 2021 Vol: 25 Issue: 5

A Comprehensive Financial Decision-Making Literature Review 1964-2021

Muhammad Asif, Sheikh Zayed Medical College/Hospital

Dr. Muhammad Khaid Rashid, Government College of Science

Mr. Bilal Ahmed Sheikh, Sheikh Zayed Medical College/Hospital


Efficient & Effective Decision Making is a great game that is chalenging from starting of the time to the present time same as the financial decision-making is more complication and tight criteria on current time as per especially uncertainty involved in their decision. The present study is tried to investigate to point out the major Theories and models that play a key role play in financial decision making. Secondary data would be used to achieve the result/conclusion. The authors and their excellence work article that are already published in journals. The golden key statement regarding financial decision-making is to try to share all stakeholders, financial decision-makers and general people.


Rational Decision, Behavioral Decision, Optimization, Philosophies, Perceptions.


Financial decision is a crucial area where the critical decisions are considered as the most powerful. It isn't the decision of a single individual; indeed, decision-making is a process that may lead to the final point by considering the opinions of people linked to the relevant field. The behavioral theory of financial decision-making involves the use of rational and unbiased decision-making power. It is said that the financial decision-makers are non-emotional and critically rational while applying the decisions in the functioning of firms. However, the behavioral impacts are observed in the decision-making in the monetary arena. Behavioral financial decision-making is discussing the effect of decision making without the involvement of the mathematical and calculation tools. It is simply the use of human behavior in motivating the role of decisions of a financial sector of a firm (Zahera, 2018).

Rational analysis is focusing on the potential power for the decision-makers. It is a genuine and helpful tool to read more about the matters of decision-making in terms of the rational level. This may be affected by behavioral and other factors. So, the rational theory is a normative plan to justify the situation for timely decision-making. It may desire for the possible level of decision making by involving the role of the person with the current decision-making features. It may demand the avail of the whole data available in the record regarding a specific issue. The details should be lucid and timely to validate the decision-making course. The rational decision and decision-making desires for the involvement of the highest possible decision-making details and data. This may strengthen the decision for the specific point in consideration (Challoumis, 2019).

Researchers also originate that under the effect of numerous personal factors as data, risk broad-mindedness, mindfulness then calculation, the personal makings and depositor feelings, disposition and outlooks; physical depositors depart in this regard from rational behavior. This is accountable for the change in the decision-making patterns. The current research paper is focusing on the historical modifications and changes in financial decision-making by reading and analyzing the historical development of the decision-making in the financial sector with time. It is elaborating the critical analysis from 1964 till 2020. The technological and other changes are also known to have an intentional impact upon decision-making during this age (Metawa, 2019).

The Objective of the Study

The current study has the following main objectives:

1. To review the role of already in use finance and natural economics in the explanation of asset decision taking grounded upon refrain of stockholder rationality.

2. The study is to join organized the significant advances and charities in these expanses.

3. This study accomplishes the objectives by reviewing the philosophies, perceptions and, earlier literature (Costa, 2019).

Significance of the Study

The current research is analyzing the value of financial decisions in rational forms. Depositors develop the special reserves with the objects with growing prosperity. But, the performance of speculation exceedingly depends upon excellence of the speculation conclusions considered by stockholders and the excellence of the speculation choices may be exaggerated by countless factors counting the individual issues of stockholders. Outmoded money processes consider that investors' exhibition completes the rationality though assembly venture decisions. Itis the decision-making tendency (Zahera, 2018). It always tries to maximize their homecoming. Whereas in the case of behavioral finance, the decision-maker rejects the belief in flawless rationality besides clarifies the character of various preconceptions. Here, awareness of the thought of rationality and its creature in decision making is essential. This basic idea is the process may help them to detect and side step asset slip-ups and to recover the value of venture decision taking and presentation (Metawa, 2019).


Rationality is ideally a normative perspective. Costa (2019) shares it is a methodology for faultless decision-making as a perfect of individuals in the financial sector. clear the period rationality as a way and skill of behaviors that is appropriate for attainment of specified areas. It works within the limits of firm circumstances and restraints. Metawa (2019) described it as the term rationality includes multiple concerns in this regard. First, when the investor will get updates, then surely, he will update and renew their principles functionally and actively (Metawa, 2019). So, in the way, it is also definite by Bayes’ law. Then, as indicated and given in the Savage's conception of subjective analysis of finances, it is a projected effectiveness, investors make normatively acceptable choices. Behavioral patterns are playing an important role in decision-making. Rational planning may discourage the use of other tendencies for decision-making (Braun, 2019).

The business experts have the potential to go for new challenges. They are averse to changes and amendments. They have enough power to bear and get adjusted to the changes all the time. They are focusing on the motivation to explore and improve the working of the businesses (Subramaniam, 2017). The decision-makers are rational in managing the decisions for the firm in such a way that the firm will have the highest possible level of advantage in this way. A decision-maker is a skilled person. He is intending to sort out solutions in a step-wise plan. First of all, the rational plan may let him consider the main points in the problem. This may highlight the simple opinions to solve the problems. Later, in the next step, he will be there with some possible solutions. For this purpose, practical experience and technical knowledge may play an active role to reach the end (Kapoor, 2017).

Rationality in Standard Finance

In standard finance, decision-making is an essential consideration. Here, the role of rationality becomes stronger. It may tell the decision-maker that how to weigh the power of a working decision. The decision will not be abrupt and fast. The decision-maker in the standard finance plan will reconsider the opinions before taking the final order regarding a point (Braun, 2019). According to Subramaniam (2017), the expected utility theory is involved in the standard finances. Here, the investors are entirely rational as they can contract with multifaceted selections. They come underoccupied risk-averse so they need to make the most of their prosperity. Investors are intending to exploit their well-being in this way. They have given their favorites and constraints to the business planners. It is by amassing the probability-weighted results in the proper form of quantified terms of utility. One may say that the investors select the portfolio in such a way that improves their expected helpfulness. It is also unhurried in rapports of expected return but the concern is to diminish all the possible risks or losses (Subramaniam, 2017; Antony & Joseph, 2017)).

According to Subramaniam (2017) that in the current day business plans, an efficient financial market is needed. Here, the lucid investors can promptly and alone reproduce the market data. It is to make the most of proceeds. So, no one can uninterruptedly downfall the souk to earn surplus revenues from the business all the time. The vital hypothesis of the Competent Bazaar Suggestion is also picking the same opinion. It says that investors are exclusively rational and can value securities sensibly. It also implies that the current investors can finalize the fundamental assessment of safekeeping and security for the firms (Subramaniam, 2017). Costa, (2019) shows the steps of the asset and decision-making process, mostly the savers assess others peculation possessions that are founded on the expected usefulness. In this way, they may choose the alternative asset for the purpose. The investors are active which also presents the maximum expected utility. Sometimes, the decision-makers are experts in managing the risk plans. The skilled decision-makers are adept at cove ring the risks of the businesses to cater to the highest possible advantage from the business (Costa, 2019; BattaglioJr et al., 2019).

Criticisms against Rationality

Rationality is a support feature in the process of decision-making. It is a genuine and helpful plan to enhance the working of the firms and taking the proper and timely decisions for the progress of the business. Still, there is an opinion that it isn't possible in a world where human beings have emotions to take the decision wholly by rational behaviors. So, it is a considered opinion that the decisions are impacted by the emotions and the feelings of the decision-maker at the specific time (Challoumis, 2019). This may be a negative opinion and might be a threat to the planning of the decision-making work. This may highlight the part of the emotional and psychological in the decision-making plan. This also weakens the reliability factor in this regard. It is going to weaken the analysis plan for the practical functioning of the decision- makers. This is a critical opinion that is against the process of rationality in the decision-making processes. It is not only about the emotional factors that may influence the performance of the decision makers’ rational usage but also some other factors such as demographic ones. They have an influence upon the decision making so it is also weakening the choice makers’ rational attitude (Kapoor, 2017; Baker et al., 2019).

Zahera, (2018), identified a couple of shared and recurrent investment behaviors. It is also regarding asset decision taking. Individual savers reveal damage in the relevant behavioral pattern. Most of the time, the investors may nose dive to partake upon the economic asset categories in the market. It is just because the investors tend to employment too antagonistically. In this way, they are working in share purchase decisions investors planning. This is often used in the historical presentation of stocks. It is practical, to assess the act of theories. Here, the investors behave parallel to apiece other for improved decision planning. The developed level of effect of historical high or low interchange stocks is the outcome (Zahera, 2018). According to Subramaniam (2017), under the heaviness of indecision in the outlay patterns. It is to achieve the optimum decision in the monetary sectors. Thus, they are bound to acceptdefective decision-making actions or confusions. Human ruling and judging plan is additional factors. They may take experiential shortcuts that steadily deviate from the focused decisions (Subramaniam, 2017).

Rationality in Behavioral Finance

Mainly, behavioral money stabs to classify and clarify the influence of reasoning errors and feelings on the monetary decision taking of companies (Challoumis, 2019). Braun (2019) labeled behavioral economics as a schoolwork of people. It is how people appreciate and react to information to make investment decisions in companies and firms. In general, there are two main constituents for decision-making. They are studied in the behavioral finance literature as the main concerns. The openings documentation of variances in the Efficient Bazaar Hypothesis and the last one is the understanding and analysis of investor behaviors. The second one is also called biases which are not available in agreement with the classical economic plus financial theories of rational behaviors (Braun, 2019). Here are some theories. They focus on how investors interpret the decisions. It is like how to do with the information generously available to them for a particular decision pattern. Kapoor (2017) mentioned that behavioral economics supports in this regard. It helps understand investor behavior and intellectual capabilities for a firm. Here, as they have many cognitive biases so they may work differently. They are to restrict their intellectual capabilities (Kapoor, 2017).

Valaskova (2019) read about some theories critically. He focused on some, such as reactions in specific herding behavior. They are following the pattern of thrust policies. They show that they are linking in the trading rules. They are some Well-organized Marketplace analysis and make the representations and theories of outmoded finance. They are unsuitable for specific relating investment risk and returns. It offers a better sympathetic of the depositors' behavior. It is also reading its applications in the actual market practices. Behavior is playing a role in applying the process of decisions in the finances. The emotions cannot be discriminated from the human beings so it is sure that they will be functional in this regard. People might be using them as the main tools and they will have some impact upon the financial decision-making plans (Valaskova, 2019).

In this regard, there are three melodies in behavioral money. They are named as heuristics, inclosing, and market disorganizations for financial decision-making. Heuristics means stockholders often make asset decisions by using planning. They are indeed based on rules of thumb. It should be without subsequent rational surveys and analysis patterns. As, people have limited memory width, so the specific info dispensation capability and computational skill are only to solve complex issues. This is the main reasoning focusses are required for multifaceted problems that may exceed people's intellectual capacities while making decisions. Secondly, framing means a special and planned way so, a problematic point or situation presented to person’s determination affect the financial behavioral decision. Lastly, the market inefficiencies are following the plan to discuss the final consequences in marketplace. They are not in contract with rational outlooks. They are also away from the market competence. In a nutshell, all of these features comprise non-rational in the process of decision-making designs. They might include mispricing and return anomalies in this record (Zahera, 2018).

Literature Review

Costa, (2019) future that as a rational saver, a person should analyze and assess data widely to get ahead in their speculation doings. Conferring to Metawa, (2019), the actual investors have unlimited reasoning and computing capacity with a clear mind. This is why it supports investors to mirror all possible selections and their results. The rational tendency may desire the accurate and functional involvement of the possible and available data for the decision-making. It may discourage the involvement and role of the data other than the decision-making plans. The better way is to get to more details of the problem so biased decision-making should also be discouraged for the matter. In real situations, it may happen that the concept of rationality may change in saver’s perspectives. It may happen that the doubt and danger are there. It is unfinished information vis-à-vis an alternate or higher level of intricacy that might be announced (Costa, 2019). Investors incline to deviate the new records from rationality. It is for owed to various restraints. These are actually due to the influence of mental and some other relevant issues. This may go to the process of rationality, is also called restricted rationality in the real world. Restricted term also refers to specific cognitive restrictions regarding decision-making. Here, is founded on the quarrel about rationality that persons have limited decision taking competences in the real biosphere concerns (Metawa, 2019).

The standard investment is working upon the hypothesis of how the investor's shrewdness work. It is about the old theories in finance that may assume that decision-makers in a proper manner. They may do this after appraising all available data to them. Lucid investors brand specific decisions. Here, their investment choices maximize and get a high percentage of loss in the market. Here, their turn over and the specific tradeoff is countable. They have all the information regarding the decision plan that is essential for estimating the return of the plan. This may include the danger of various investment replacements and make asset decisions based on this data and data analysis (Costa, 2019). Generally, rational investors tend to read and properly guess the fundamental ideals of financial assets available to them. A normative model is there. It is about the rational choice under menace is vacant to do so. It is also by the formation of utility theory developed exactlying 1947 which changed the mindset of people. Affording to concept of the expected utility theory where the concept is modified, investors are entirely rational. They can deal with complex choices and take decisions. They are risk-averse and need to exploit their prosperity in this way. Savers make the most of their well-being in this way. They have given their favorites and restrictions for it. So, by combining the probability-weighted consequences for it. They have counted in footings of utility for the record. In other words, investors select the selection that augments the top of decisions (Subramaniam, 2017).

Rational management in the decision-making may desire for the availability of the whole and clear data of the decision-making issue, so it is also a matter of concern that in some cases, the data isn't complete. This missing and confusing analysis may lead to the wrong decision-making (Subramaniam, 2017). The financial issues demand elaborate information, this is an essential feature of the matter. So, if the rational planning for the decision-making desires the proper facts, then it is mandatory to get it done by involving the details of the matter. Otherwise, the rational analysis might be failing to generate the data. In real settings, stakeholder's behaviors may also arise to turn to rules of ample rationality. This is happening when doubt and peril are there. It is a piece of incomplete information regarding an alternative (Kapoor, 2017). It may be a higher level of difficulty that is presented to follow patterns. Investors tend to deviate from levelheadedness for good owed to countless constraints. This power be due to the impact of mental and other factors that are straight impacting the decisions. These special situation principals to the creation of another idea for financial decision-making. It is called bounded rationality in the real world. Bounded rationality is related to cognitive limitations for decision-making. In economic patterns, they are built on the cognitive arguments that individuals have inadequate decision taking proficiencies as per emotional effects (Costa, 2019)

Research Methodology

We are using a systematic plan of literature review method in the current study. It is the potential to go through the qualitative skill-building approach. The current study is sorting out the major theories and models to justify the rationality role in financial decision-making. Mostly the articles are catered from the already conducted researches and books on the same topics. The present analysis is highlighting the track record of the six decades, from 1961 to 2020. So, most of the articles are picked from the data available in this period (Costa, 2019).


The data is collected by using the record available from the historical perspective. Here, the probable record is catered from the last six decades. The major data is tracked from the period limit from 1961 till 2020. This is helpful as most of the samples are falling in the varied range of the time limit (Zahera, 2018). The samples are aligned and set with the help of the following Table 1

Table 1 Sample Collection Table
Sr. No Journal Name Author Name Article Name Time Period
1 Journal of Business Miller, M.H., Behavioral Rationality in Finance: The Case of Dividends. 1986
2 Financial Analysts Journal Thaler, R.H., The End of Behavioral Finance. 1999
3 The American Economic Review Patel, J., Zeckhauser, R. And Hendricks, D., The Rationality Struggle: Illustrations from Financial Markets. 1991
4 Handbooks in Operations Research and Management Science De Bondt, W.F. And Thaler, R.H., Financial Decision-Making in Markets and Firms: A Behavioral Perspective. 1995
5 Financial Analysts Journal Olsen, R.A., Behavioral Finance and Its Implications for Stock-Price Volatility. 1998
6 Financial Analysts Journal Statman, M., Behavioral Finance: Past Battles and Future Engagements. 1999
7 Management Science Journal Moorcroft, J.D., Rationality in The Analysis of Behavioral Simulation Models. 1985
8 Education & Technology Journal Ricciardi, V. And Simon, H.K., What Is Behavioral Finance? Business, 2000
9 Calif. L. Rev. Journal Korobkin, R.B. And Ulen, T.S., Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics. 2000
10 Interfaces Journal Myers, S.C., Finance Theory and Financial Strategy. 1984
11 American Journal of Political Science Strom, K., A Behavioral Theory of Competitive Political Parties. 1990
12 Financial Management Barton, S.L., Hill, N.C. And Sundaram, S., An Empirical Test of Stakeholder Theory Predictions of Capital Structure. 1979
13 Strategic Management Journal Barton, S.L. And Gordon, P. J Corporate Strategy and Capital Structure. 1988
14 Journal of Economic Perspectives Shleifer, A. And Summers, L.H., The Noise Trader Approach to Finance. 1990
15 Journal of Economic Behavior & Organization Fiegenbaum, A., Prospect Theory and The Risk-Return Association: An Empirical Examination In 85 Industries. 1970
16 Journal ofBehavior Finances Gil Cohen And AndreyKudryavastev Investors Rationality and Financial Decisions 2012
17 Investment Management and Financial Innovations K.C. Tseng Behavioral Finance, Bounded Rationality, Neuro-Finance, And Traditional Finance 2006
18 Research Gate Byunghwan Lee
John Obrien
An Analysis of Financial Analysts Optimism in Long-Term Growth Forecasts 2004
19 Journal of Interdisciplinary Economics JasmonTayun, Zamri Ahmad Psychoanalysis of Investor Irrationality and Dynamism in Stock Market 2017
20 Behavioral Finances and Investor Psychology DrSatish Kumar Special Issue Call for Papers from Qualitative Research in Financial Markets 2000
21 Journal of Economics and Financial Studies Md. Al Mamun A, Md. Abu Syeedb, Farida Yasmeen B Are Investors Rational, Irrational or Normal? 2015
22 Accounting Research Journal Leon WongYichelle Zhang Review of Behavioral Finance 2020
23 International Journal of Financial Studies Whenzen Mai, NikItan Short-Selling and Financial Performance of Smes In China: The Mediating Role of Csr Performance 2021
24 International Journal of Financial Studies UmairBaig, Batool Muhammad Hussain Exploring Investment Behavior of Women Entrepreneur: Some Future Directions 2021
25 International Journal of Financial Studies Espin Siren, Minh Thi Tick Size and Price Reversal After Order Imbalance 2021


The concept of rationality term implies that people should be accomplished to get specific and pertinent information. It is also to analyze the information by using suitable means. The use of the techniques is to make a last choice. They are founded on the consequences of the examination for the settings specifically needed in a situation of the reach of further info implementation. A lucid investor is a special person who is full of info/ he knows about all the venture boulevards lying for the decision to him. He must know about their risk and return characteristics. These are supplementary structures, for this purpose he should be able to estimate those investment walks primarily on their danger. They will be on a coming back trade-off. It is by means of many replicas of money. They are capable to make the maximum investment choice. it is based on his objective; it is in a perfect and no bias means for decision-making power. In a nutshell, rationality relates to principles and theories of maximization, in addition to selfishness and consistently excellent.

Old-style money calculations and decision powers has strongly supposed that savers are fully rational decision takers in their areas. Though, the notion of faultless rationality chiefly shoulders that savers can find the product. Here, the whole gen and may be valid in the chance of a special and popular part of the stakeholders in modern countries. The local investors in a reduced number of developed countries have different concerns. They have to look various restraints and difficulties in getting the entire info. In conclusion, in some of the country’s financial intelligences, the business and monetary fortnightlies and journals are available in a global language that is helpful to cater data regarding literature on this topic.


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