Critical Conceptual Analysis on Modern Finance Theories

Abstract

The main aim of this research paper is to investigate fundamental paradigms in modern financial theory. Stock markets are characterized by a complex nonlinear dynamics that does not converge towards a known finality, respectively a result that can be anticipated or influenced, or at least reduced at the level of a limit cycle. In this context, the very concept of investment rationality reaches a completely different meaning. Thus, limited rationality replaces rational expectations. Financial investors are characterized by certain features. However, inherent deviations from rational investment behavior provide an indisputable empirical evidence regarding the existence of anomalies on the capital market. The classical finance paradigm incorporates the idea that rational investors select an efficient portfolio in order to obtain the highest long-term stock returns but the risk must not exceed the tolerable limit. On the other hand, behavioral finance theory argues that the decision-making process is definitely affected by psychological, affective and emotional factors.

Keywords

• capital market
• arbitration
• investor rationality
• chaos
• fractal
• information efficiency