¡°A Flaw in the Model ¡­ that Defines How the World Works¡±

Volker Bieta, Hellmuth Milde and Nadine Marianne Weber

International Journal of Financial Research, 2012, vol. 3, issue 1, 81-87

Abstract: In this paper we claim that modeling financial markets based on probability theory is a severe systematic mistake that led to the global financial crisis. We argue that the crisis was not just the result of risk managers using outdated financial data; we think that the employed efficiency model¡ªalso referred to as stochastic model¡ªis basically flawed. In an exemplary way, we will prove to the reader that this model is unable to account for interactions between market participants, neglects strategic interdependences and hence leads to erroneous solutions. Our central message is that the existing efficiency model should be replaced by an approach using agent-based scenario analysis.

Keywords: Random Walk; Efficient Market Hypothesis; Financial Market Crisis; Event Uncertainty; Behavioral Uncertainty; Agency Theory; Incentive Scheme; Game Theory (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:jfr:ijfr11:v:3:y:2012:i:1:p:81-87

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