The Distinction Of The Modern Finance Paradigm Confluence

Using models in which agents are rational , the modern classical financial theoryexplains financial markets in general equilibrium or no arbitrage framework. However,the human decisions are far from the rational assumptions in reality, there ara manyparadoxes and anomalies that the modern classical financial theory can not fullyexplain. Based on the arguments of the psychology research, behavioral financemodels give the puzzles some reasonable explanations and become the importantresearch fields of finance. Behavioral finance represents a revolution in financial theory, a revolution thathas emerged among both academics and practitioners over the past decade or two. Itis a genuine revolution, since it largely scraps the dominant rational paradigm, theexpected utility optimization theory and the efficient markets hypothesis. Behavioralfinance substitutes new constructs, new fundmental ideas. The behavioral financerevolution is a return to a more eclectic approach to finance, no longer tied to anarrow theoretical framework. Behavioral finance takes into account insights fromother social sciences, notably psychology, but also sociology, political science andanthropology. The paper represents two core concepts rational paradigm and behavioalparadigm with an analysis of the two financial theory branches classical finance andbehavioral finance.It goes far beyond delineating the weakness of classical financialtheory, and also detailed presentation of alternatives, and an analysis of the ralationsbetween the different theoretical approaches. Finally, we draw a conclusion on thetrend of the amalgamation of the two subjects.