Advisor Insights

Build Bridges, Not Walls

Paul Kaplan

Financial economics, like other fields, can be rife with controversy. Perhaps one of the greatest controversies has been that between classical and behavioral finance. Clearly, economists on both sides have made significant contributions to our understanding of how investors behave and how financial markets work, as is evident in that leading thinkers from both schools have received the Nobel Memorial Prize in Economic Sciences.

So, if both schools have something to contribute, is it possible to reconcile their theories and find a middle ground? I believe that the answer is yes. In fact, I am working with an academic (Yale’s Roger Ibbotson) and two of my colleagues at Morningstar (Thomas Idzorek and James Xiong) on a monograph to be published by the CFA Institute Research Foundation called “Popularity: A Bridge Between Classical and Behavioral Finance.” As the title says, we think that our approach, which we call popularity, provides a bridge between the opposing camps.[1] Below, I outline what we cover in the monograph. But before I do, I first explain my own journey from neoclassical economics to developing the theoretical basis for popularity, which incorporates elements of both classical and behavioral finance.