A Flaw in the Model… That Defines How the World Works
The authors of this paper claim that modeling financial markets based on probability theory is a severe systematic mistake that led to the global financial crisis. They argue that the crisis was not just the result of risk managers using outdated f...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20101208092950 http://hdl.handle.net/10986/3980 |
| Summary: | The authors of this paper claim that
modeling financial markets based on probability theory is a
severe systematic mistake that led to the global financial
crisis. They argue that the crisis was not just the result
of risk managers using outdated financial data, but that the
employed efficiency model -- also referred to as the
stochastic model -- is basically flawed. In an exemplary
way, the analysis proves that this model is unable to
account for interactions between market participants,
neglects strategic interdependences, and hence leads to
erroneous solutions. The central message is that the
existing efficiency model should be replaced by an approach
using agent-based scenario analysis. |
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