Toward a General Model of Financial Markets
42 Pages Posted: 3 May 2016 Last revised: 30 Oct 2018
Date Written: September 1, 2018
This paper discusses the efficient market hypothesis and behavioral finance under a general framework using the literature of decision theories and information sciences. The focus is centered on the broad denition of subjective rationality, the imprecision, and reliability of information. The main thesis advanced is that the roots of behavioral anomalies are the imprecision and reliability of information. We show that the proposed general framework is useful to understand economic/financial puzzles consistently. We exemplify insurance and gambling, and equity premium puzzles for this purpose. We also present a possible fuzzy representation of market efficiency.
Keywords: Efficient markets; Behavioral finance; Decision theory; Information uncertainty
JEL Classification: G02, G10, G14, D81
Suggested Citation: Suggested Citation