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¡°A Flaw in the Model ¡­ that Defines How the World Works¡±

Author

Listed:
  • Volker Bieta
  • Hellmuth Milde
  • Nadine Marianne Weber

Abstract

In this paper we claim that modeling financial markets based on probability theory is a severe systematic mistake that led to the global financial crisis. We argue that the crisis was not just the result of risk managers using outdated financial data; we think that the employed efficiency model¡ªalso referred to as stochastic model¡ªis basically flawed. In an exemplary way, we will prove to the reader that this model is unable to account for interactions between market participants, neglects strategic interdependences and hence leads to erroneous solutions. Our central message is that the existing efficiency model should be replaced by an approach using agent-based scenario analysis.

Suggested Citation

  • Volker Bieta & Hellmuth Milde & Nadine Marianne Weber, 2012. "¡°A Flaw in the Model ¡­ that Defines How the World Works¡±," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 3(1), pages 81-87, January.
    • Handle: RePEc:jfr:ijfr11:v:3:y:2012:i:1:p:81-87
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    References listed on IDEAS

    as
    1. Taleb, Nassim Nicholas, 2007. "Black Swans and the Domains of Statistics," The American Statistician, American Statistical Association, vol. 61, pages 198-200, August.
    2. Jean Tirole, 2006. "The Theory of Corporate Finance," Post-Print hal-00173191, HAL.
    3. Joseph E. Stiglitz, 2002. "Information and the Change in the Paradigm in Economics," American Economic Review, American Economic Association, vol. 92(3), pages 460-501, June.
    Full references (including those not matched with items on IDEAS)

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