Blinded by Science: The Empirical Case for Quantum Models in Finance

Abstract

The idea that markets are at equilibrium and price changes follow some version of a random walk is key to foundational results from quantitative finance including the Black-Scholes option-pricing model, and is related to other tenets of finance such as market efficiency and the no-arbitrage principle. However it is also inconsistent with the observed price behaviour of both assets and options. Quantum finance offers an alternative approach which captures the dynamic and probabilistic nature of financial transactions, and leads to different predictions of market behaviour. This paper summarises a range of empirical evidence which falsifies the classical equilibrium-based approach including the principles of no-arbitrage and market efficiency; shows how contradictory data have long been downplayed or ignored in the classical literature; and argues that quantum models are better aligned with empirical reality.

Keywords: stock markets, financial options, implied volatility, quantum economics, quantum finance

JEL Classification: G10, G12