Complex Evolutionary Systems in Behavioral Finance

Hommes, Cars H.; Wagener, Florian

doi:10.2139/ssrn.1137907

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Complex Evolutionary Systems in Behavioral Finance

Tinbergen Institute Discussion Paper No. 2008-054/1

70 Pages Posted: 27 May 2008

See all articles by Cars H. Hommes

Cars H. Hommes

Government of Canada - Bank of Canada; CeNDEF, Amsterdam School of Economics, University of Amsterdam; Tinbergen Institute

Florian Wagener

University of Amsterdam - Center for Nonlinear Dynamics in Economics and Finance (CeNDEF) - Department of Quantitative Economics; Tinbergen Institute

Date Written: May 2008

Abstract

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

JEL Classification: C13, C91, C92, D84, G12

Suggested Citation: Suggested Citation

Hommes, Cars H. and Wagener, Florian O.O., Complex Evolutionary Systems in Behavioral Finance (May 2008). Tinbergen Institute Discussion Paper No. 2008-054/1, Available at SSRN: https://ssrn.com/abstract=1137907 or http://dx.doi.org/10.2139/ssrn.1137907