Complex Evolutionary Systems in Behavioral Finance
AbstractTraditional finance is built on the rationality paradigm. This chapter discusses simple models from an alternative approach in which financial markets are viewed as complex evolutionary systems. Agents are boundedly rational and base their investment decisions upon market forecasting heuristics. Prices and beliefs about future prices co-evolve over time with mutual feedback. Strategy choice is driven by evolutionary selection, so that agents tend to adopt strategies that were successful in the past. Calibration of "simple complexity models" with heterogeneous expectations to real financial market data and laboratory experiments with human subjects are also discussed.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 08-054/1.
Date of creation: 27 May 2008
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Asset pricing; heterogeneous beliefs; empirical validation; forecasting experiments;
Other versions of this item:
- Hommes, C.H. & Wagener, F.O.O., 2008. "Complex evolutionary systems in behavioral finance," CeNDEF Working Papers 08-05, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-06-21 (All new papers)
- NEP-CBA-2008-06-21 (Central Banking)
- NEP-CFN-2008-06-21 (Corporate Finance)
- NEP-EXP-2008-06-21 (Experimental Economics)
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