Application of Fuzzy Discount Factors in Behavioural Decision-Making for Financial Market Modelling

Joanna Siwek and Patryk Żywica ()
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Joanna Siwek: Department of Artificial Intelligence, Faculty of Mathematics and Computer Science, Adam Mickiewicz University, Uniwersytetu Poznańskiego 4, 61-614 Poznań, Poland
Patryk Żywica: Department of Artificial Intelligence, Faculty of Mathematics and Computer Science, Adam Mickiewicz University, Uniwersytetu Poznańskiego 4, 61-614 Poznań, Poland

Econometrics, 2025, vol. 13, issue 1, 1-12

Abstract: This paper presents an innovative approach to financial market modelling by integrating fuzzy discount factors into the decision-making process, thereby reflecting the complexities of human behaviour. Traditional financial models often fail to account for market dynamics’ psychological factors. The proposed method utilizes fuzzy logic to encapsulate the uncertainty and subjective judgment inherent in financial decisions. By representing financial variables as fuzzy numbers, the model better simulates the way humans assess information and make decisions under uncertainty. The incorporation of fuzzy discount factors marks a significant shift from deterministic to a more realistic representation of financial markets, suitable for practical application. This methodology offers a nuanced investment strategy that balances theoretical rigour with real-world applicability, appealing to a broad spectrum of investors. The aim of the following paper is to introduce an alternative to price modelling with the use of fuzzy return rates, which results in some errors in the mathematical model. The solution has the form of introducing fuzzy discount factors (FDFs) that retain the advantages of the fuzzy approach (e.g., encompassing subjectivity and imprecision) while preserving the shape of the fuzzy number modelling a price.

Keywords: discount factor; fuzzy number; portfolio management (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2025
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