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

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  2. Economics, Finance, Business & Management
  3. Credit and Capital Markets – Kredit und Kapital
  4. Vol. 54, Issue 3
  5. pp. 447–467

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Polleit, T. Modern Financial Market Theory – A Critique Based on the Logic of Human Action. Credit and Capital Markets – Kredit und Kapital, 54(3), 447-467. https://doi.org/10.3790/ccm.54.3.447
Polleit, Thorsten "Modern Financial Market Theory – A Critique Based on the Logic of Human Action" Credit and Capital Markets – Kredit und Kapital 54.3, 2021, 447-467. https://doi.org/10.3790/ccm.54.3.447
Polleit, Thorsten (2021): Modern Financial Market Theory – A Critique Based on the Logic of Human Action, in: Credit and Capital Markets – Kredit und Kapital, vol. 54, iss. 3, 447-467, [online] https://doi.org/10.3790/ccm.54.3.447
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Modern Financial Market Theory – A Critique Based on the Logic of Human Action

Polleit, Thorsten

Credit and Capital Markets – Kredit und Kapital, Vol. 54(2021), Iss. 3 : pp. 447–467 | First published online: December 07, 2021

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Publisher Name
Duncker & Humblot
DOI
https://doi.org/10.3790/ccm.54.3.447
Language
English
Pages
21
License
CC BY 4.0
Keywords

Author Details

Honorary Professor Dr. Thorsten Polleit, University of Bayreuth, Universitäts­straße 30, 95440 Bayreuth.

References

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  3. Belke, A./Gros, D. (2018): Event studies and the random walk hypothesis: Why the end of bond buying by the ECB is a non-event, Voxeu, CEPF, 21 December, https://voxeu.org/content/event-studies-and-random-walk-hypothesis-why-end-bond-buying-ecb-non-event.  Google Scholar
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  5. Belke, A./Polleit, T. (2006): Dividend Yields for Forecasting Stock Market Returns. An ARDL Cointegration Analysis for Germany, in: Ekonomia, Cyprus Economic Society and University of Cyprus, Vol. 9(1), Summer, pp. 86–116.  Google Scholar
  6. Bernstein, P. L. (2005): Capital Ideas. The improbable origins of modern Wall Street, John Wiley & Sons, Inc., Hoboken, New Jersey.  Google Scholar
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  11. DeBondt, W. F. M./Thaler, R. (1995): Does the Stock Market Overreact? Journal of Finance, 40, pp. 793–805.  Google Scholar
  12. De Long, J. B./Shleifer, A./Summers, L. H./Waldmann, R. J. (1990): Positive Feedback Investment Strategies and Destabilizing Rational Speculation. Journal of Finance, June, 45:2, pp. 379–395.  Google Scholar
  13. Dias de Sousa, R. E. C./Howden, D. (2015): The Efficient Market Conjecture. Quarterly Journal of Austrian Economics, Vol. 18, No. 4, Winter, pp. 387–408.  Google Scholar
  14. Fama, E. F. (2014): Two Pillars of Asset Pricing. American Economic Review, 104, pp. 1467–1485.  Google Scholar
  15. Fama, E. F. (1970): Efficient capital markets: a review of theory and empirical work. Journal of Finance 25, pp. 383–417.  Google Scholar
  16. Fama, E. F. (1965): The behavior of stock market prices. Journal of Business 38, pp. 34–105.  Google Scholar
  17. Fama, E. F. (1965): Random walks in stock market prices. Financial Analysts Journal 21, pp. 55–59.  Google Scholar
  18. Greenwood, R./Shleifer, A./Yang, Y. (2019): Bubbles for Fama*. Journal of Financial Economics, Volume 131, Issue 1, January, pp. 20–43.  Google Scholar
  19. Hartwig, K.-H. (1976): Kritisch-rationale Methodologie und ökonomische Forschungspraxis. Zum Gesetzesbegriff in der Nationalökonomie, Peter Lang, Frankfurt a.M., Bern, Las Vegas.  Google Scholar
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  24. Hoppe, H.-H. (1983): Kritik der kausalwissenschaftlichen Sozialforschung. Untersuchungen zur Grundlegung von Soziologie und Ökonomie, Studien zur Sozialwissenschaft, Westdeutscher Verlag, Opladen.  Google Scholar
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  27. Lo, A. W. (2007): Efficient Markets Hypothesis. The New Palgrave: A Dictionary of Economics, L. Blume, S. Durlauf (eds.), 2nd Edition, Palgrave Macmillan Ltd.  Google Scholar
  28. Machlup, F. (1978): Methodology of Economics and Other Social Sciences. Economic Theory, Econometrics, And Mathematical Economics, Academic Press, New York, San Francisco, London.  Google Scholar
  29. Markowitz, H. M. (1952): Portfolio Selection. The Journal of Finance, Vol. 7, No. 1. March, pp. 77–91.  Google Scholar
  30. Mises, L. v. (1998): Human Action. A Treatise on Economics, Ludwig von Mises Institute, Auburn, US Alabama.  Google Scholar
  31. Mises, L. v. (1957): Theory and History. An Interpretation of Social and Economic Evolution, Ludwig von Mises Institute, Auburn, US Alabama.  Google Scholar
  32. Mossin, J. (1966): Equilibrium in a Capital Asset Market. Econometrica, 34, pp. 768–783.  Google Scholar
  33. Mueller, A. (2001): Financial Cycles, Business Activity, and the Stock Market. The Quarterly Journal of Austrian Economics, Vol. 4, No. 1, Spring, pp. 3–21.  Google Scholar
  34. Muth, J. F. (1961): Rational Expectations and the Theory of Price Movements. Econometrica, Vol. 29, No. 3., July, pp. 315–335.  Google Scholar
  35. Polleit, T. (2020a): A Critique of Economic Knowledge. The Economic and Politics of Freedom for the III Millennium, Essays in Honor of Prince Hans-Adam II of Liechtenstein, Kurt R. Leube (ed.), van Eck Publishers, pp. 85–96.  Google Scholar
  36. 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
  37. Rothbard, M. N. (2011): Economic Controversies, Ludwig von Mises Institute, Auburn, US Alabama.  Google Scholar
  38. Samuelson, P. (1965): Proof that properly anticipated prices fluctuate randomly. Industrial Management Review 6, pp. 41–49.  Google Scholar
  39. Sargent, T. J. (2007): Evolution and Intelligent Design, AEA Presidential Address, New York University.  Google Scholar
  40. Sargent, T. J. (1972): Rational Expectations and the Term Structure of Interest Rate. Journal of Money, Credit and Banking, 4(1), pp. 74–97.  Google Scholar
  41. 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
  42. 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
  43. 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
  44. Sharpe, W. F. (1963): A simplified model for portfolio analysis. Management Science, Vol. 9, January, pp. 277–293.  Google Scholar
  45. Shefrin, H. (2000): Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing. Boston, Mass., Harvard Business School Press.  Google Scholar
  46. 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
  47. Shleifer, A. (2000): Inefficient Markets, Oxford, Oxford University Press.  Google Scholar
  48. Siegel, J. J. (2002): Stocks for the Long Run, third Edition, New York, McGraw-Hill.  Google Scholar
  49. Taylor, J. B. (1983): Rational Expectations Models in Macroeconomics, NBER Working Paper No. 1224, November.  Google Scholar
  50. Tetens, H. (2006): Kants “Kritik der reinen Vernunft”. Ein systematischer Kommentar, Philipp Reclam jun., Stuttgart.  Google Scholar
  51. Beechey, M./Gruen, D./Vickery, J. (2000): The Efficient Market Hypothesis: A Survey, Research Discussion Paper 01, January, Reserve Bank of Australia.  Google Scholar
  52. Belke, A./Gros, D. (2021): QE in the euro area: Has the PSPP benefited peripheral bonds? Journal of International Financial Markets, Institutions and Money, 73, p. 101350.  Google Scholar
  53. Belke, A./Gros, D. (2018): Event studies and the random walk hypothesis: Why the end of bond buying by the ECB is a non-event, Voxeu, CEPF, 21 December, https://voxeu.org/content/event-studies-and-random-walk-hypothesis-why-end-bond-buying-ecb-non-event.  Google Scholar
  54. Belke, A./Polleit, T. (2009): Monetary Economics in Globalised Financial Markets, Springer, Heidelberg, London, New York.  Google Scholar
  55. Belke, A./Polleit, T. (2006): Dividend Yields for Forecasting Stock Market Returns. An ARDL Cointegration Analysis for Germany, in: Ekonomia, Cyprus Economic Society and University of Cyprus, Vol. 9(1), Summer, pp. 86–116.  Google Scholar
  56. Bernstein, P. L. (2005): Capital Ideas. The improbable origins of modern Wall Street, John Wiley & Sons, Inc., Hoboken, New Jersey.  Google Scholar
  57. Buffett, W. E. (2019): Annual Meetings, Warren Buffett Archive, 5 April, www.buffett.cnbc.com/video/2007/05/05/afternoon-session---2007-berkshire-hathaway-annual-meeting.html.  Google Scholar
  58. Bullard, J. B. (1991): Learning, Rational Expectations and Policy: A Summary of Recent Research, Federal Reserve Bank of St. Louis, January/February, Vol. 73, No. 1, pp. 50–60.  Google Scholar
  59. Cohen, M. R./Nagel, E. (1934): An Introduction To Logic And Scientific Method, Simons Publications Inc., Safety Harbour.  Google Scholar
  60. Cuthbertson, K. (1996): Quantitative Financial Economics. Stocks, Bonds and Foreign Exchange, John Wiley & Sons, Chichester et al.  Google Scholar
  61. DeBondt, W. F. M./Thaler, R. (1995): Does the Stock Market Overreact? Journal of Finance, 40, pp. 793–805.  Google Scholar
  62. De Long, J. B./Shleifer, A./Summers, L. H./Waldmann, R. J. (1990): Positive Feedback Investment Strategies and Destabilizing Rational Speculation. Journal of Finance, June, 45:2, pp. 379–395.  Google Scholar
  63. Dias de Sousa, R. E. C./Howden, D. (2015): The Efficient Market Conjecture. Quarterly Journal of Austrian Economics, Vol. 18, No. 4, Winter, pp. 387–408.  Google Scholar
  64. Fama, E. F. (2014): Two Pillars of Asset Pricing. American Economic Review, 104, pp. 1467–1485.  Google Scholar
  65. Fama, E. F. (1970): Efficient capital markets: a review of theory and empirical work. Journal of Finance 25, pp. 383–417.  Google Scholar
  66. Fama, E. F. (1965): The behavior of stock market prices. Journal of Business 38, pp. 34–105.  Google Scholar
  67. Fama, E. F. (1965): Random walks in stock market prices. Financial Analysts Journal 21, pp. 55–59.  Google Scholar
  68. Greenwood, R./Shleifer, A./Yang, Y. (2019): Bubbles for Fama*. Journal of Financial Economics, Volume 131, Issue 1, January, pp. 20–43.  Google Scholar
  69. Hartwig, K.-H. (1976): Kritisch-rationale Methodologie und ökonomische Forschungspraxis. Zum Gesetzesbegriff in der Nationalökonomie, Peter Lang, Frankfurt a.M., Bern, Las Vegas.  Google Scholar
  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
  72. Hoppe, H.-H. (1997): On Certainty and Uncertainty. Review of Austrian Economics 10, No. I, pp. 49–78.  Google Scholar
  73. Hoppe, H. H. (1995): Economic Science and the Austrian Method, Ludwig von Mises Institute, Auburn, US Alabama.  Google Scholar
  74. Hoppe, H.-H. (1983): Kritik der kausalwissenschaftlichen Sozialforschung. Untersuchungen zur Grundlegung von Soziologie und Ökonomie, Studien zur Sozialwissenschaft, Westdeutscher Verlag, Opladen.  Google Scholar
  75. Kahneman, D./Slovic, P./Tversky, A. (eds.), (1982): New York and Cambridge, Cambridge University Press.  Google Scholar
  76. Lintner, J. (1965): The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets. The Review of Economics and Statistics, Vol. 47, No. 1 (Feb., 1965), pp. 13–37.  Google Scholar
  77. Lo, A. W. (2007): Efficient Markets Hypothesis. The New Palgrave: A Dictionary of Economics, L. Blume, S. Durlauf (eds.), 2nd Edition, Palgrave Macmillan Ltd.  Google Scholar
  78. Machlup, F. (1978): Methodology of Economics and Other Social Sciences. Economic Theory, Econometrics, And Mathematical Economics, Academic Press, New York, San Francisco, London.  Google Scholar
  79. Markowitz, H. M. (1952): Portfolio Selection. The Journal of Finance, Vol. 7, No. 1. March, pp. 77–91.  Google Scholar
  80. Mises, L. v. (1998): Human Action. A Treatise on Economics, Ludwig von Mises Institute, Auburn, US Alabama.  Google Scholar
  81. Mises, L. v. (1957): Theory and History. An Interpretation of Social and Economic Evolution, Ludwig von Mises Institute, Auburn, US Alabama.  Google Scholar
  82. Mossin, J. (1966): Equilibrium in a Capital Asset Market. Econometrica, 34, pp. 768–783.  Google Scholar
  83. Mueller, A. (2001): Financial Cycles, Business Activity, and the Stock Market. The Quarterly Journal of Austrian Economics, Vol. 4, No. 1, Spring, pp. 3–21.  Google Scholar
  84. Muth, J. F. (1961): Rational Expectations and the Theory of Price Movements. Econometrica, Vol. 29, No. 3., July, pp. 315–335.  Google Scholar
  85. Polleit, T. (2020a): A Critique of Economic Knowledge. The Economic and Politics of Freedom for the III Millennium, Essays in Honor of Prince Hans-Adam II of Liechtenstein, Kurt R. Leube (ed.), van Eck Publishers, pp. 85–96.  Google Scholar
  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
  87. Rothbard, M. N. (2011): Economic Controversies, Ludwig von Mises Institute, Auburn, US Alabama.  Google Scholar
  88. Samuelson, P. (1965): Proof that properly anticipated prices fluctuate randomly. Industrial Management Review 6, pp. 41–49.  Google Scholar
  89. Sargent, T. J. (2007): Evolution and Intelligent Design, AEA Presidential Address, New York University.  Google Scholar
  90. Sargent, T. J. (1972): Rational Expectations and the Term Structure of Interest Rate. Journal of Money, Credit and Banking, 4(1), pp. 74–97.  Google Scholar
  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

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.

Table of Contents

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

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