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Complex Evolutionary Systems in Behavioral Finance

Cars Hommes () and Florian Wagener ()

No 08-054/1, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This discussion paper led to a chapter in: (K.R. Schenk-Hoppe & T. Hens (Eds.,)) Handbook of Financial Markets: Dynamics and Evolution , Amsterdam:North Holland/Elsevier, 2009. Traditional finance is built on the rationality paradigm. This chapter discusses simple models from an alternative approach in which financial markets are viewed as complex evolutionary systems. Agents are boundedly rational and base their investment decisions upon market forecasting heuristics. Prices and beliefs about future prices co-evolve over time with mutual feedback. Strategy choice is driven by evolutionary selection, so that agents tend to adopt strategies that were successful in the past. Calibration of "simple complexity models" with heterogeneous expectations to real financial market data and laboratory experiments with human subjects are also discussed.

Keywords: Asset pricing; heterogeneous beliefs; empirical validation; forecasting experiments (search for similar items in EconPapers)
JEL-codes: C13 C91 C92 D84 G12 (search for similar items in EconPapers)
Date: 2008-05-27
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