A New Foundation for Financial Markets and Social Science

Richard O. Michaud ()
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Richard O. Michaud: New Frontier Advisors

Chapter Chapter 8 in Finance's Wrong Turns, 2023, pp 105-121 from Springer

Abstract: Abstract In the mid-1960s, finance took a critical wrong turn that fundamentally affected the value of theory and the investment effectiveness of quantitative tools for asset management. This was unfortunate since a more reliable foundation had been proposed by MarkowitzMarkowitz, H. (Journal of Finance 7(1): 77–91, 1952) and developed in MarkowitzMarkowitz, H. (Portfolio Selection: Efficient Diversification of Investments, 2nd ed. New York and Cambridge, MA: Wiley and Basil Blackwell, 1959). In addition, neoclassical finance, the dominant theory of modern financeModern finance for more than sixty years, was also based on expected utilityExpected utility axioms now understood as a flawed investor decision-making framework with major negative consequences for much of investment technology in current practice.

Keywords: Game rationality; Knight uncertainty; Prisoner’s dilemma; Psychology; Sociology (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-21863-7_8

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DOI: 10.1007/978-3-031-21863-7_8

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