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From standard to evolutionary finance: a literature survey

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  • Thomas Holtfort

    (FOM University of Economics and Management)

Abstract

The traditional financial paradigm seeks to understand financial markets by using models in which markets are perfect, which includes agents who are “rational” and update their beliefs correctly based on new information. By comparison, the new institutional economics approach attempts to provide a more realistic picture of economic processes, even in financial markets, by postulating several market imperfections, including the agents’ limited rationality. In contrast, behavioral finance completely challenges the rationality assumption and aims to improve the understanding of financial markets by assuming that, due to psychological factors, investors’ decisions will contradict the expected utility theory. However, the traditional, new institutional and the behavioral finance models all share one important feature: They are all based on the notion of a representative agent even though this mythological figure is dressed differently. Evolutionary finance suggests a model of portfolio selection and asset price dynamics that is explicitly based on the ideas of investors’ heterogeneity, dynamics and changes, learning and a natural selection of strategies. The paper suggests a systematization of this new approach, which is subsequently used to conduct a state-of-the-art literature survey and an evaluation of evolutionary finance research.

Suggested Citation

  • Thomas Holtfort, 2019. "From standard to evolutionary finance: a literature survey," Management Review Quarterly, Springer, vol. 69(2), pages 207-232, June.
  • Handle: RePEc:spr:manrev:v:69:y:2019:i:2:d:10.1007_s11301-018-0151-9
    DOI: 10.1007/s11301-018-0151-9
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    1. Mikhail Zhitlukhin, 2020. "A continuous-time asset market game with short-lived assets," Papers 2008.13230, arXiv.org.
    2. Yaroslav Drokin & Mikhail Zhitlukhin, 2020. "Relative growth optimal strategies in an asset market game," Annals of Finance, Springer, vol. 16(4), pages 529-546, December.
    3. Evstigneev, Igor & Hens, Thorsten & Potapova, Valeriya & Schenk-Hoppé, Klaus R., 2020. "Behavioral equilibrium and evolutionary dynamics in asset markets," Journal of Mathematical Economics, Elsevier, vol. 91(C), pages 121-135.
    4. Mikhail Zhitlukhin, 2020. "Asymptotic minimization of expected time to reach a large wealth level in an asset market game," Papers 2007.04909, arXiv.org.
    5. Mikhail Zhitlukhin, 2021. "Capital growth and survival strategies in a market with endogenous prices," Papers 2101.09777, arXiv.org.

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    More about this item

    Keywords

    Evolutionary finance; Traditional finance; Behavioral finance; Financial markets;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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