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Modern Financial Market Theory – A Critique Based on the Logic of Human Action

Modern Financial Market Theory – A Critique Based on the Logic of Human Action
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Year:    2021

Author:    Polleit, Thorsten

Credit and Capital Markets – Kredit und Kapital, Vol. 54 (2021), Iss. 3 : pp. 447–467

Abstract

The modern financial market theory (MFMT) – based on the efficient market hypothesis, rational expectation theory, and modern portfolio theory – has become the standard approach in financial market economics. In this article, the MFMT will be critically ­reviewed using the logic of human action (or: praxeology) as an epistemological meta­theory. It will be shown that the MFMT exhibits (praxeo-)logical deficiencies so that it cannot provide investors with well-founded decision-making support in real-world financial markets.

Journal Article Details

Publisher Name:    Global Science Press

Language:    English

DOI:    https://doi.org/10.3790/ccm.54.3.447

Credit and Capital Markets – Kredit und Kapital, Vol. 54 (2021), Iss. 3 : pp. 447–467

Published online:    2021-07

AMS Subject Headings:    Duncker & Humblot

Copyright:    COPYRIGHT: © Global Science Press

Pages:    21

Keywords:    Efficient Market Hypothesis Rational Expectation Theory Modern Portfolio Theory Capital Asset Pricing Model Economic Methodology Logic of human action Austrian Economics B4 B41 E3 G1 G110 G14 G140 G41

Author Details

Polleit, Thorsten

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  70. Höffe, O. (2007): Immanuel Kant, Verlag C.H. Beck, München.  Google Scholar
  71. Hoppe, H.-H. (2006): On Praxeology and the Praxeological Foundation of Epistemology, in: The Economics and Ethics of Private Property. Studies in Political Economy and Philosophy, 2nd ed., Ludwig von Mises Institute, Auburn, US Alabama, pp. 265–294.  Google Scholar
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  73. Hoppe, H. H. (1995): Economic Science and the Austrian Method, Ludwig von Mises Institute, Auburn, US Alabama.  Google Scholar
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  75. Kahneman, D./Slovic, P./Tversky, A. (eds.), (1982): New York and Cambridge, Cambridge University Press.  Google Scholar
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  84. Muth, J. F. (1961): Rational Expectations and the Theory of Price Movements. Econometrica, Vol. 29, No. 3., July, pp. 315–335.  Google Scholar
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  86. Polleit, T. (2020b): Die Rolle des Kritischen Rationalismus in der Volkswirtschaftslehre, LI-Paper, Oktober, https://www.libinst.ch/publikationen/LI-Paper-Polleit-Kritischer-Rationalismus-Volkswirtschaftslehre.pdf.  Google Scholar
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  91. Sargent, T. J./Wallace, N. (1975): Rational Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule, in: Journal of Political Economy, 83, pp. 241–254.  Google Scholar
  92. Sargent, T. J./Wallace, N. (1971): Market Transaction Costs, Asset Demand Functions, and the Relative Potency of Monetary and Fiscal Policy. Journal of Money, Credit and Banking, 3 (2, Part 2), pp. 469–505.  Google Scholar
  93. Sharpe, W. F. (1964): Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk. The Journal of Finance 19(3), pp. 425–442.  Google Scholar
  94. Sharpe, W. F. (1963): A simplified model for portfolio analysis. Management Science, Vol. 9, January, pp. 277–293.  Google Scholar
  95. Shefrin, H. (2000): Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing. Boston, Mass., Harvard Business School Press.  Google Scholar
  96. Shiller, R. J. (2003): From Efficient Markets Theory to Behavioral Finance. Journal of Economic Perspectives, Volume 17, Number 1, Winter, pp. 83–104.  Google Scholar
  97. Shleifer, A. (2000): Inefficient Markets, Oxford, Oxford University Press.  Google Scholar
  98. Siegel, J. J. (2002): Stocks for the Long Run, third Edition, New York, McGraw-Hill.  Google Scholar
  99. Taylor, J. B. (1983): Rational Expectations Models in Macroeconomics, NBER Working Paper No. 1224, November.  Google Scholar
  100. Tetens, H. (2006): Kants “Kritik der reinen Vernunft”. Ein systematischer Kommentar, Philipp Reclam jun., Stuttgart.  Google Scholar

Section Title Page Action Price
Thorsten Polleit: Modern Financial Market Theory – A Critique Based on the Logic of Human Action 1
Abstract 1
I. Introduction 2
II. Starting Point: The Logic of Human Action 3
III. Critique of the Efficient Market Hypothesis 5
Digression: The Behavioural Finance Critique 9
IV. Critique of the Rational Expectation Theory 1
V. Critique of the Modern Portfolio Theory 1
VI. Way Forward: Less Government Interventionism 1
References 1