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date: 24 November 2020

Abstract and Keywords

This chapter argues for the use of game theory or agent-based modeling to go beyond the standard methods used in traditional approaches to finance. The theory of rational expectations is at the core of most theories of finance in use since the 1970s, but it is also very unrealistic. This chapter first introduces some very general thoughts about elements needed in a new framework for finance. Then a few concrete examples of heterogeneous agent-based models will be introduced, and several of their main results will be discussed. Finally, applications and methods to real-market data will be introduced, notably the idea of “decoupling” to explain the short-lived synchronization of investors.

Keywords: agent-based modeling, synchronization, complex system, symmetry break, behavioral finance

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