December 7th, 2010
Rational financial markets? If it had gone according to Egon Sohmen, it would be the current financial crisis did not come. He was deeply convinced of the inherent stability of financial markets and the generally stabilizing effect of speculation.Speculative bubbles, as we have in recent times, first on the real estate markets experienced and then on the stock and commodity markets would have been a temporary glitch in his eyes that would have regressed without making a sound.
His argument sounds convincing today: If the market value of an investment object corresponds to the long-term average of about its fundamental value, then there are discrepancies between these two values is greater potential for a move to fundamental value as to the fundamental value away. Speculators who relied on an expansion of the deviation will be suffered in so StatIt agent losses. Speculators, however, who put on a return to fundamental value of the market value will generate profits and increase their investment by the price movement in this direction. The upshot of these considerations is that profitable speculators tend to stabilize prices and destabilizing speculators automatically disappear from the market because they will go out in the long run the money.
In the finance literature this line of argument is known as the efficient market hypothesis. It is theoretically elegant, but is on a rather weak empirical foundation. Especially after the recent financial crisis, there are few out there, the view, the Finazmärkten it would be rational, truly represents seriously.
Economists the farewell of the efficient market hypothesis, however, harder to understand than many non-economists can. But it implies a departure from the central assumption of almost all modern economic theory, economic agents act rationally according to the. Finally the farewell run from the assumption of efficient financial markets that is also a departure from the “homo economicus”, whereby the theoretical foundations of the whole of neoclassical microeconomics and macroeconomics dominated would be called into question.
Homo economicus and homo sapiens
The discrepancies between the building on the assumption of rational behavior predictions of traditional economic theory and the actual processes in the financial markets have become so large that now more and more economists are willing to at least partially adopt the homo economicus. Thus, in the context of “behavioral finance” attempts to take into account fundamental insights from psychology in predicting human behavior. This extension of the economic horizon has not been limited to financial market analysis, but has continued in the relatively new discipline of behavioral economics at a broad level.
The key to the popularity of behavioral economics has contributed to the new book by Akerlof and Shiller, in which they are the “animal spirits” at the center. This term, borrowed from John Maynard Keynes is to illustrate how human behavior from animal instincts, and how little it is guided by rational reason.
From an established, secure micro foundation resting on empirical behavioral economics we are still far away. The problems in the integration of social psychological aspects stir ultimately, therefore, that scientific progress in the economy is too often understood as a step forward in the consistent modeling of economic issues. It is consistent that arise in the individual steps of analysis and model results, no contradictions with the model assumptions – and a very central assumption is the assumption of rational behavior. This methodology is not irrational behavior that is accessible.