Bounded Rationality by Temptation in Investment

Abstract

Rationality is a common assumption that can be found everywhere in traditional economic theory. We always assume that investors are rational and the preference of investors is consistent. But we can always see irrational behaviors in capital market. We use changing utility function to describe character of time-inconsistency for some people so as to study their investment preference about return and risk. And we explain why there exists so many irrational behaviors in the financial market. Investors themselves suffer from this kind of behaviors and financial institute which is selling risky asset take this opportunity to exploit investors.