Frontiers of finance: Evolution and efficient markets

TLDR

The Efficient Markets Hypothesis has spurred diverse research, from sophisticated mathematical models to evolutionary frameworks that view markets as dynamic systems of competing agents evolving under economic selection. This review surveys recent advances in quantitative modeling of financial markets. The authors describe an evolutionary view in which financial agents compete and adapt, but not necessarily optimally.

Abstract

In this review article, we explore several recent advances in the quantitative modeling of financial markets. We begin with the Efficient Markets Hypothesis and describe how this controversial idea has stimulated a number of new directions of research, some focusing on more elaborate mathematical models that are capable of rationalizing the empirical facts, others taking a completely different tack in rejecting rationality altogether. One of the most promising directions is to view financial markets from a biological perspective and, specifically, within an evolutionary framework in which markets, instruments, institutions, and investors interact and evolve dynamically according to the "law" of economic selection. Under this view, financial agents compete and adapt, but they do not necessarily do so in an optimal fashion. Evolutionary and ecological models of financial markets is truly a new frontier whose exploration has just begun.