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This paper provides one potential theoretical explanation of bubbles and crashes in the market. It involves a psychoanalytic understanding of financial instabilities and the irrational behaviours of financial practitioners. We demonstrate that financial anomalies are ignified through the process of an "emotional trajectory" related to four crucial...
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... At the heart of the questioning is the fundamental incapacity of neoclassical theory to embody the formation of bubbles and their following crashes, stating that equilibrium is always prevailing, thanks to the existence of precisely the invisible hand and the rational agent. Before the recent 20 0 0 and 2008 crashes a good deal of works had been performed to study bubbles formation and their bursts by physicists [2][3][4][5][6][7] as well by economists [8][9][10][11][12][13][14][15][16] . At odd with such innovative prevailing views, we present a model inspired from sociophysics [17][18][19][20][21] , which produces bubbles as equilibrium states of a given market and crashes as the emergence of a new equilibrium. ...
The substantial turmoil created by both 2000 dot-com crash and 2008 subprime
crisis has fueled the belief that the two classical paradigms of economics,
which are the invisible hand and the rational agent, are not appropriate to
describe market dynamics and should be abandoned at the benefit of alternative
new theoretical concepts. At odd with such a view, using a simple model of
choice dynamics from sociophysics, the invisible hand and the rational agent
paradigms are given a new legitimacy. Indeed, it is sufficient to introduce the
holding of a few intermediate mini market aggregations by agents sharing their
own private information, to recenter the invisible hand and the rational agent
at the heart of market self regulation including the making of bubbles and
their subsequent crashes. In so doing, an elasticity is discovered in the
market efficiency mechanism due to the existence of agents anticipation. This
elasticity is found to create spontaneous bubbles, which are rationally
founded, and at the same time, it provokes crashes when the limit of elasticity
is reached. Although the findings disclose a path to put an end to the
bubble-crash phenomena, it is argued to be rationality not feasible.
... It implies an awareness threshold determining the level to which an agent puts a confidence weight. This necessarily " non-linear model " leads to features like avalanches, bubbles, etc.[19,20]. Of course, we do not claim that these features are only (or even mainly) due to irrational agents nor to irrational behaviors. ...
Following a Geometrical Brownian Motion extension into an Irrational
Fractional Brownian Motion model, we re-examine agent behaviour reacting to
time dependent news on the log-returns thereby modifying a financial market
evolution. We specifically discuss the role of financial news or economic
information positive or negative feedback of such irrational (or contrarian)
agents upon the price evolution. We observe a kink-like effect reminiscent of
soliton behaviour, suggesting how analysts' forecasts errors induce stock
prices to adjust accordingly, thereby proposing a measure of the irrational
force in a market.
