“A Flaw in the Model … that Defines How the World Works”

Volker Bieta, Hellmuth Milde, Nadine Marianne Weber

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 We argue that the crisis was not just the result of risk managers using outdated financial data; we think that the employed efficiency model—also referred to as stochastic model—is basically flawed.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.

Full Text: PDF DOI: 10.5430/ijfr.v3n1p81

Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 License.

International Journal of Financial Research
ISSN 1923-4023(Print) ISSN 1923-4031(Online)

 

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