From standard to evolutionary finance: a literature survey

Abstract

The traditional financial paradigm seeks to understand financial markets by using models in which markets are perfect, which includes agents who are "rational" and update their beliefs correctly based on new information. By comparison, the new institutional economics approach attempts to provide a more realistic picture of economic processes, even in financial markets, by postulating several market imperfections, including the agents' limited rationality. In contrast, behavioral finance completely challenges the rationality assumption and aims to improve the understanding of financial markets by assuming that, due to psychological factors, investors' decisions will contradict the expected utility theory. However, the traditional, new institutional and the behavioral finance models all share one important feature: They are all based on the notion of a representative agent even though this mythological figure is dressed differently. Evolutionary finance suggests a model of portfolio selection and asset price dynamics that is explicitly based on the ideas of investors' heterogeneity, dynamics and changes, learning and a natural selection of strategies. The paper suggests a systematization of this new approach, which is subsequently used to conduct a state-of-the-art literature survey and an evaluation of evolutionary finance research.

Remarks on the behaviour of financial market efficiency during the COVID-19 pandemic. The case of VIX

“…By the beginning of the XXI century, EMH came under scrutiny. A more nuanced understanding of the markets’ mechanisms views stock prices as, at least partially, predictable and past prices’ patterns and ‘fundamental’ variables as a prediction base for their future evolutions (for some discussions and empirical evidences, see ( Brown, 2011 , Caporale et al, 2018 , Gippel, 2012 , Holtfort, 2019 , Malkiel, 2003 , Shostak, 1997 )). Although, at the moment, there is no single unified alternative to EMH, ‘behavioral finance’ ( Hirshleifer, 2002 , Kapoor and Prosad, 2017 , Ritter, 2003 ), the ‘adaptive markets hypothesis’ (AMH) ( Lo, 2004 , Lo, 2005 ) or ‘fractal market hypothesis’ (FMH) ( Anderson and Noss, 2013 , Peters, 1994 ) provide insights about the mechanisms that might push the markets in (relative) inefficiency areas.…”

Relative growth optimal strategies in an asset market game

“…In later works this field is termed Evolutionary Finance. Recent literature reviews of it can be found in [8,10].…”

“…F t = σ(X s , s ≤ t). If X t are not equal to a constant vector a.s., (10) we find that W ′ t satisfies the equation…”

Evolution in pecunia

“…20). For a most recent review of studies related to EF, see Holtfort (37). A novel line of research in EF considering models with endogenous asset supply was initiated in Amir et al (38).…”