WANTED: A New Model for Financial Markets
Simplicity on the near side of Complexity is Fools Gold!
"Don Putnam, designer of investment products since the 1970's points to the most fundamental of lessons learned from last year's global financial implosion. "Markets are defined by their participants as much as they are by their mechanics', and it is people's motivations that ultimately count. The car is important but the driver crucial - and panic among drivers, if you will, makes the technology of the roadways irrelevant, says Putnam. To some, that conclusion may seem self-evident, but to accept it sweeps way assumptions that for half a century, it formed the foundation of the financial industry. The reigning theory often referred to in shorthand as 'efficient markets", is deeply embedded in the way markets operate. The regulations fo funds and banks both ultimately hinge on these assumptions. So do many laws concerning securities fraud. It is central to business schools' curriculum and is part of the Chartered Financial Analyst Qualification that ct as a gateway to the investment profession.
EVOLUTIONARY FINANCE: An Alternative Approach
Finance applies statistics to financial markets as a top-down approach. Statistics assume implicity that the underlying process produces random outcomes which are stable and stochastically predictable. The stability hypothesis in finance, such as rationality, the efficient market hypothesis, arbitrage, fundamental intrinsic value, and market equilibrium provide the foundation of Modern Finance Theory.
An alternative approach however is evolutionary finance, which is a bottom-up approach that starts with the behavior of market participants. The evolutionary approach has gained ground in a variety of sciences. The constitutional metaphor of the bottom-up approach is evolutionary biology, instead of mechanical and statistical physics as used in neoclassical finance. The Santa Fe Institute, a research center for the evolutionary approach in science was founded in 1984, has played an important role in promoting the evolutionary approach.
Evolutionary finance is grounded on a number of related theories, such as dynamic systems, reflexivity. complexity, and emergence."
Hat Tip ~ HETERODOX INVESTMENT THEORY, Thomas Pistorius
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