Financial Market Analysis and Behaviour: The Adaptive Preference Hypothesis

299 Pages·2022·11.284 MB·English

by  Emil Dinga, Camelia Oprean-Stan, Cristina-Roxana Tănăsescu, Vasile Brătian, Gabriela-Mariana Ionescu

Financial Market Analysis
and Behaviour
This book addresses the functioning of financialmarkets, in particular, the financial
market model, and modelling. More specificall , the book provides a model of
adaptive preference in the financial market rather than the model of the adaptive
financial market, which is mostly based on Popper’s objective propensity for the
singular, that is, unrepeatable, event. As a result, the concept of proference, following
Simon’s theory of satisficing,is developed in a logical way with the goal of supplying
a foundation for a robust theory of adaptive preference in financialmarket behaviour.
The book offers new insights into financial market logic and psychology:
(1) advocating for the priority of behaviour over information – in opposition
to traditional financial market theories; (2) constructing the processes of
(co)evolution between adaptive preference and financial market, by using the
concept of fetal reaction norms; (3) presenting a new typology of information in
the financialmarket, aimed at proving point (1), as well as edifying an explicative
mechanism of the evolutionary nature and behaviour of the (real) financialmarket;
(4) presenting sufficient and necessary, principles or assumptions for developing
a theory of adaptive preference in the financialmarket; and (5) proposing a new
interpretation of the pair genotype-phenotype in the financial market model.
The book’s distinguishing feature is its research method, which is mainly
logically rather than historically or empirically based. As a result, the book is
targeted at generating debate about the best and most scientifically beneficial
method of approaching, analysing, and modelling financial markets.
Emil Dinga is Senior Researcher at the Centre for Financial and Monetary
Research, Romanian Academy, Bucharest, Romania.
Camelia Oprean-Stan is Professor of Finance at the Lucian Blaga University of
Sibiu, Romania.
Cristina-Roxana Tănăsescu is Professor of Economic Methodology at the
Lucian Blaga University of Sibiu, Romania.
Vasile Brătian is Associate Professor at the Faculty of Economics at the Lucian
Blaga University of Sibiu, Romania.
Gabriela-Mariana Ionescu is an economist and a PhD student in the School of
Advanced Studies of the Romanian Academy, Bucharest, Romania.
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For more information about this series, please visit: www.routledge.com/
Routledge-Studies-in-Economic-Theory-Method-and-Philosophy/book-series/
RSEMTP
Financial Market Analysis
and Behaviour
The Adaptive Preference Hypothesis
Emil Dinga, Camelia Oprean-Stan,
Cristina-Roxana Tănăsescu, Vasile
Brătian, and Gabriela-Mariana Ionescu
First published 2023
by Routledge
4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
605 Third Avenue, New York, NY 10158
Routledge is an imprint of the Taylor & Francis Group, an informa
business
© 2023 Emil Dinga, Camelia Oprean-Stan, Cristina-Roxana Tănăsescu,
Vasile Brătian, and Gabriela-Mariana Ionescu
The right of Emil Dinga, Camelia Oprean-Stan, Cristina-Roxana
Tănăsescu, Vasile Brătian, and Gabriela-Mariana Ionescu to be identified
as authors of this work has been asserted in accordance with sections 77
and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and explanation
without intent to infringe.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Names: Dinga, Emil, author. | Oprean-Stan, Camelia, author. | Tănăsescu,
Cristina-Roxana, 1951– author. | Brătian, Vasile, author. | Ionescu,
Gabriela-Mariana, author.
Title: Financial market analysis and behaviour : the adaptive preference
hypothesis / Emil Dinga, Camelia Oprean-Stan, Cristina-Roxana
Tănăsescu, Vasile Brătian, and Gabriela-Mariana Ionescu.
Description: Milton Park, Abingdon, Oxon ; New York, NY : Routledge,
2022. | Series: Routledge studies in economic theory, method and
philosophy | Includes bibliographical references and index.
Identifiers: LCCN 202200 158 (print) | LCCN 2022001159 (ebook) |
ISBN 9781032255163 (hardback) | ISBN 9781032255187 (paperback) |
ISBN 9781003283690 (ebook)
Subjects: LCSH: Finance—Research—Methodology. | Finance—Decision
making—Methodology.
Classification: LCC HG152 .D56 2022 (print) | LCC HG152 (ebook) |
DDC 332.63/2042—dc23/eng/20220118
LC record available at https://lccn.loc.gov/2022001158
LC ebook record available at https://lccn.loc.gov/2022001159
ISBN: 978-1-032-25516-3 (hbk)
ISBN: 978-1-032-25518-7 (pbk)
ISBN: 978-1-003-28369-0 (ebk)
DOI: 10.4324/9781003283690
Typeset in Times New Roman
by Apex CoVantage, LLC
Contents

List of figures x

List of tables xii

Preface xiii

Acknowledgement xv

1 Adaptive preference 1

Introduction 1

Rationality, expectation, belief, preference 1

Behaviour led by rationality 2

Behaviour led by expectation 2

Behaviour led by belief 3

Behaviour led by preference 3

The concept of economic preference 4

The role of economic preference in economic behaviour 5

The concept of adaptation 6

The concept of adaptive preference 7

State of the art 9

The neoclassical perspective 10

The behavioural perspective 10

The institutional perspective 11

The evolutionist (evolutionary) perspective 12

Setting of the problem 13

Discussion 15

Topic I: The logical content of the concept of adaptive

preference 15

Topic II: Typology of adaptive preference 17

On the basis of the cause 18

According to the scope criterion 19

By criterion of origin 19
vi Contents
Topic III: The three P’s of total risk management and the

adaptive preference 19

Concerning the price 20

Concerning the probabilities 20

Concerning the preferences 21

Topic IV: Double adaptability on the financial market 22

Topic V: Elasticity and plasticity in adaptive preference 23

Elasticity 23

Plasticity 24

Topic VI: Competitiveness, cooperativeness, and indifference
in the kinematics of adaptive preference 26

The win-win case 26

The win-loss case 27

Topic VII: Co-evolution in adaptive preference 29

Topic VIII: Adaptive preference and automatic stabilizers 31

Topic IX: Adaptive preference and natural values on the
financial market 33

The concept of natural value in economics 33

Natural values and the financial market 34

Adaptive preference and financial market natural

values 35

Topic X: Adaptive preference and double selection on the

financial market 35

Topic XI: Autopoietic adaptive preference 37

Suggestions for future research topics 39

2 Mechanism of adaptive preference 55

Introduction 55

Preamble 55

The concepts of modelling and model 55

Modelling 55

Model 57

The concept of logical model/logical modelling 59

The predicates of the logical model 60

Conditions for configuring logical models 60

Financial market and the logical model 61

The necessity for a logical modelling of the financial
market 61

Preliminaries 61

The necessity for a logical modelling of the financial
market 61
Contents vii

The possibility of logical modelling of the financial
market 62

Remarkable logical models of the financial market in the
specialty literature 63

The Efficient Market Hypothesis 64

Adaptive Market Hypothesis 69

Preliminaries to a logical model of adaptive preference 75

Adaptive preference and adaptive market 75

Information and behaviour 78

Adaptation and reaction norm 79

The concept of reaction 80

Reaction classification criteria 81

Classes of reactions 81

Reaction norms 82

Adaptation and exaptation 83

Co-adaptation and co-evolution 84

Expectation and anticipation 86

Exogeneity and endogeneity in the functioning of adaptive

preference 87

Adaptive preferences and level of aggregation 89

Adaptive preferences and synergy 91

Selection and self-organization/autopoieticity 93

Adaptation, specialization, and success 94

The internal logic of financial market models 97

A draft of a logical model of adaptive preference in the financial

market 98

Preamble 98

Principles 99

Logical analysis of the principles 100

The general mechanism of the principles

operationalization 102

Catalysts, cycles, and hypercycles 102

Catalysts 102

Cycles and hypercycles 104

Feedback 105

Outline of a logical model of adaptive preference 107

Generalities and assumptions 107

Synoptic 109

Short discussion 110

A short Kuhn-ian examination of EMH and AMH 117

Preliminaries 117
viii Contents
General background 118

The concept of paradigm 118

On the criteria to assess a logical model qua

paradigm 121

Paradigmatically assessing EMH 124

Institutive condition 124

Conservative condition 126

Regulative condition 126

Paradigmatically assessing AMH 129

Institutive condition 129

Conservative condition 131

Regulative condition 132

Results 134

Conclusions 135

Suggestions for future research topics 136

3 A (stylized) modelling of adaptive preference 166

Propensities 166

Preamble 166

The purpose of equational adaptive preference

modelling 166

Propensity theory 167

The concept of propensity 167

Main propensity issues 171

Assumptions of the equational model of adaptive

preference 176

Theoretical assumptions 177

Methodological assumptions 177

Analysis of assumptions 178

Analysis of theoretical assumptions 178

Analysis of methodological assumptions 186

The mix information-behaviour on the financial market 194

Preliminaries 194

General notations 197

Available informational mix 197

Conceptual aspects 197

Specific notation 198

Quantitative relationships 198

Discussion 198

Short conclusions 208
Contents ix
Accessible informational mix 208

Conceptual aspects 208

Specific notations 212

Quantitative relationships 213

Discussion 214

Conclusion 218

Accessed informational mix 218

Propensity and adaptive preference on the financial
market 218

Preliminary hypotheses 228

Auxiliary discussion 229

Suggestions for future research topics 232

Financial market analysis and behaviour: The adaptive

preference hypothesis 252

Annex 1: Analogy in modelling 252

Annex 2: Brief summary of the probability problem 255

Index 276