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A flaw in the model ... that defines how the world works

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  • Bieta, Volker
  • Milde, Hellmuth
  • Weber, Nadine

Abstract

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 They argue that the crisis was not just the result of risk managers using outdated financial data, but that the employed efficiency model -- also referred to as the stochastic model -- is basically flawed.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

Suggested Citation

  • Bieta, Volker & Milde, Hellmuth & Weber, Nadine, 2010. "A flaw in the model ... that defines how the world works," Policy Research Working Paper Series 5498, The World Bank.
  • Handle: RePEc:wbk:wbrwps:5498
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    Keywords

    Banks&Banking Reform; Debt Markets; Labor Policies; Access to Finance; Economic Theory&Research;

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