Harmony and Divergence between Behavioral Finance and Islamic Finance

Abstract

This comparative study explores behavioral finance and Islamic finance in depth, highlighting their fundamental differences and points of convergence.

On the one hand, behavioral finance delves into the study of cognitive biases and irrational behaviors that influence financial decisions, offering an essential psychological perspective on markets. Islamic finance, on the other hand, is founded on ethical principles in line with “Sharia” law, aiming to create a financial system based on justice and equity. Prominent figures, including Kahneman &Tversky (1979), Thaler (2015) and Usmani (2002), have played a major role in the development of these fields. This analysis also examines the implications of these two approaches for financial decision-making, financial products, ethics and social responsibility. It emphasized the importance of understanding the behavioral mechanisms behind investment choices, and of designing financial products in line with ethical principles. In addition, it suggests avenues for future research, including exploring the potential integration of behavioral finance principles into Islamic finance.

Methodologically, this study is based on an analysis of academic literature and specialized sources in both fields, providing essential information on their origins, objectives, financial instruments and mechanisms. It then adopts a rigorous comparative approach to identify the crucial convergences and divergences between behavioral finance and Islamic finance.

Through the synthesis of this data, this study aspires to offer an in-depth understanding of the possible synergies between these two approaches and their potential contribution to more responsible financial markets. Ultimately, this research aims to shed light on the complex relationship between behavioral and Islamic finance, while providing practical recommendations for policymakers, investors and financial market players seeking to leverage these fields to shape a more ethical, equitable and sustainable financial future.

Keywords: Behavioral finance; Islamic finance; Cognitive bias; Sharia law; Financial decision-making.

Classification JEL: F3 International finance

Paper type: Theoretical Research