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 They argue that the crisis was not just the result of risk managers using outdated f...

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Main Authors:	Bieta, Volker, Milde, Hellmuth, Weber, Nadine
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	ACCOUNTING AGENCY PROBLEMS AMOUNT OF CAPITAL ASYMMETRIES OF INFORMATION BANKING INDUSTRY BANKING SECTOR BENEFICIARY CASH FLOW CASH FLOWS COLLATERAL COLLATERALS CONFLICTS OF INTEREST CORPORATE FINANCE CREDIT CONTRACT CREDITOR DEBT DEBT FINANCING DEBTOR DECISION MAKING DERIVATIVE DERIVATIVES ECONOMICS EFFICIENT MARKET EFFICIENT OUTCOMES EQUITY FINANCING FEDERAL REGULATORS FEDERAL RESERVE FEDERAL RESERVE SYSTEM FINANCIAL ASSET FINANCIAL ASSETS FINANCIAL CRISIS FINANCIAL DATA FINANCIAL INSTRUMENTS FINANCIAL MARKET FINANCIAL MARKETS FREE MARKETS FUTURE CASH FLOWS GAME THEORY GOVERNMENT REFORM HIGH INTEREST RATE INFORMATION ASYMMETRY INFORMATIONAL ASYMMETRY INTEREST RATE INTEREST RATES INTERNATIONAL BANK LOW INTEREST RATE MARKET PARTICIPANT MARKET PARTICIPANTS MARKET PRICES MATURITY NASH EQUILIBRIUM PERFECT COMPETITION PERFECT MARKETS PORTFOLIO PRICE TAKERS RANDOM WALK REAL ESTATE RESOURCE MOBILIZATION RISK NEUTRAL STATISTICAL DATA SUBVENTIONS WEALTH
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

id	okr-10986-3980
recordtype	oai_dc
spelling	okr-10986-39802021-04-23T14:02:14Z A Flaw in the Model… That Defines How the World Works Bieta, Volker Milde, Hellmuth Weber, Nadine ACCOUNTING AGENCY PROBLEMS AMOUNT OF CAPITAL ASYMMETRIES OF INFORMATION BANKING INDUSTRY BANKING SECTOR BENEFICIARY CASH FLOW CASH FLOWS COLLATERAL COLLATERALS CONFLICTS OF INTEREST CORPORATE FINANCE CREDIT CONTRACT CREDITOR DEBT DEBT FINANCING DEBTOR DECISION MAKING DERIVATIVE DERIVATIVES ECONOMICS EFFICIENT MARKET EFFICIENT OUTCOMES EQUITY FINANCING FEDERAL REGULATORS FEDERAL RESERVE FEDERAL RESERVE SYSTEM FINANCIAL ASSET FINANCIAL ASSETS FINANCIAL CRISIS FINANCIAL DATA FINANCIAL INSTRUMENTS FINANCIAL MARKET FINANCIAL MARKETS FREE MARKETS FUTURE CASH FLOWS GAME THEORY GOVERNMENT REFORM HIGH INTEREST RATE INFORMATION ASYMMETRY INFORMATIONAL ASYMMETRY INTEREST RATE INTEREST RATES INTERNATIONAL BANK LOW INTEREST RATE MARKET PARTICIPANT MARKET PARTICIPANTS MARKET PRICES MATURITY NASH EQUILIBRIUM PERFECT COMPETITION PERFECT MARKETS PORTFOLIO PRICE TAKERS RANDOM WALK REAL ESTATE RESOURCE MOBILIZATION RISK NEUTRAL STATISTICAL DATA SUBVENTIONS WEALTH 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. 2012-03-19T18:43:17Z 2012-03-19T18:43:17Z 2010-12-01 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 English Policy Research working paper ; no. WPS 5498 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank Publications & Research :: Policy Research Working Paper The World Region The World Region
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	ACCOUNTING AGENCY PROBLEMS AMOUNT OF CAPITAL ASYMMETRIES OF INFORMATION BANKING INDUSTRY BANKING SECTOR BENEFICIARY CASH FLOW CASH FLOWS COLLATERAL COLLATERALS CONFLICTS OF INTEREST CORPORATE FINANCE CREDIT CONTRACT CREDITOR DEBT DEBT FINANCING DEBTOR DECISION MAKING DERIVATIVE DERIVATIVES ECONOMICS EFFICIENT MARKET EFFICIENT OUTCOMES EQUITY FINANCING FEDERAL REGULATORS FEDERAL RESERVE FEDERAL RESERVE SYSTEM FINANCIAL ASSET FINANCIAL ASSETS FINANCIAL CRISIS FINANCIAL DATA FINANCIAL INSTRUMENTS FINANCIAL MARKET FINANCIAL MARKETS FREE MARKETS FUTURE CASH FLOWS GAME THEORY GOVERNMENT REFORM HIGH INTEREST RATE INFORMATION ASYMMETRY INFORMATIONAL ASYMMETRY INTEREST RATE INTEREST RATES INTERNATIONAL BANK LOW INTEREST RATE MARKET PARTICIPANT MARKET PARTICIPANTS MARKET PRICES MATURITY NASH EQUILIBRIUM PERFECT COMPETITION PERFECT MARKETS PORTFOLIO PRICE TAKERS RANDOM WALK REAL ESTATE RESOURCE MOBILIZATION RISK NEUTRAL STATISTICAL DATA SUBVENTIONS WEALTH
spellingShingle	ACCOUNTING AGENCY PROBLEMS AMOUNT OF CAPITAL ASYMMETRIES OF INFORMATION BANKING INDUSTRY BANKING SECTOR BENEFICIARY CASH FLOW CASH FLOWS COLLATERAL COLLATERALS CONFLICTS OF INTEREST CORPORATE FINANCE CREDIT CONTRACT CREDITOR DEBT DEBT FINANCING DEBTOR DECISION MAKING DERIVATIVE DERIVATIVES ECONOMICS EFFICIENT MARKET EFFICIENT OUTCOMES EQUITY FINANCING FEDERAL REGULATORS FEDERAL RESERVE FEDERAL RESERVE SYSTEM FINANCIAL ASSET FINANCIAL ASSETS FINANCIAL CRISIS FINANCIAL DATA FINANCIAL INSTRUMENTS FINANCIAL MARKET FINANCIAL MARKETS FREE MARKETS FUTURE CASH FLOWS GAME THEORY GOVERNMENT REFORM HIGH INTEREST RATE INFORMATION ASYMMETRY INFORMATIONAL ASYMMETRY INTEREST RATE INTEREST RATES INTERNATIONAL BANK LOW INTEREST RATE MARKET PARTICIPANT MARKET PARTICIPANTS MARKET PRICES MATURITY NASH EQUILIBRIUM PERFECT COMPETITION PERFECT MARKETS PORTFOLIO PRICE TAKERS RANDOM WALK REAL ESTATE RESOURCE MOBILIZATION RISK NEUTRAL STATISTICAL DATA SUBVENTIONS WEALTH Bieta, Volker Milde, Hellmuth Weber, Nadine A Flaw in the Model… That Defines How the World Works
geographic_facet	The World Region The World Region
relation	Policy Research working paper ; no. WPS 5498
description	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.
format	Publications & Research :: Policy Research Working Paper
author	Bieta, Volker Milde, Hellmuth Weber, Nadine
author_facet	Bieta, Volker Milde, Hellmuth Weber, Nadine
author_sort	Bieta, Volker
title	A Flaw in the Model… That Defines How the World Works
title_short	A Flaw in the Model… That Defines How the World Works
title_full	A Flaw in the Model… That Defines How the World Works
title_fullStr	A Flaw in the Model… That Defines How the World Works
title_full_unstemmed	A Flaw in the Model… That Defines How the World Works
title_sort	flaw in the model… that defines how the world works
publishDate	2012
url	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
_version_	1764389324374147072

A Flaw in the Model… That Defines How the World Works

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