In traditional finance, how do individuals typically make decisions?

In traditional finance, individuals are generally viewed as rational actors who make decisions based on utility theory. This theory posits that individuals aim to maximize their utility, or satisfaction, when making choices that involve risks and returns. Under this framework, it is assumed that investors will evaluate their options, weighing the potential benefits against the risks in a logical and consistent manner.

Rational decision-making leads individuals to process information in a way that they systematically consider all available data and choose the option that provides the greatest perceived value or satisfaction. This model is foundational to many financial theories and practices, as it promotes the idea that markets are efficient and that prices reflect all available information.

While in reality, people may also be influenced by emotional and psychological factors, traditional finance tends to focus on the rational, utility-based approach as a means of understanding and predicting financial behavior.