Behavioural Finance Essay Example | Topics and Well Written Essays - 2000 words

Behavioural Finance - Essay Example In some mathematical conditions, this differential equation can be integrated to solve it as indifference curve through x which is called integrability problem (Newman, 1995). 6) Georgescu-Roegen proved that if we consider two goods where differential equation defining an indifferent element is always integrable, it is essential to consider that indifference is transitive relation that denotes that integral curves are indifferent curves. Georgecu proved that transitivity condition guarantees integrable differential equations in all dimensions. Therefore, integrability conditions are unnecessary. In economic terms, integral curves are meaningless unless Axiom I and II are adopted (Newman, 1995). (8, 9) By following Sauelsons techniques, Herman Wold claimed that demand-function approach is rationally equal to the ordinal preference approach. He asserted that Houthakkers theorem is same as his method of proof. However, an analysis of Wolds proof revealed his implicit assumption that his revealed preference is a transitive relation. Wold proved his point by using certain assumptions of perfect competition; however, it is impossible to do because Wold didnt define indifference (Newman, 1995). (10) Wolds integrability assumptions are obsolete because existence of a convex boundary curve comes from this implicit assumption of the transitivity of preference not from explicit assumptions of integrability. (11) Ville deduced the existence of a utility function through excellent analytic evidence. A reasonable interpretation of his axiom can lead to a relation that brings a complete weak ordering on the commodity space. However, his criterion for consumer as "worse off" is insufficient (Newman, 1995). (12) Integrability problem suddenly appears when commodity space has three goods while transitivity problem arises when three situations are considered. Therefore, it arises even when there is two-goods case. Littles treatment assumes