ISSN:
1573-7187
Keywords:
Bayesian decision theory
;
game theory
;
arbitrage
;
coherence
;
incompleteness
;
competitive equilibrium
;
correlated equilibrium
;
capital asset pricing model
;
risk-neutral probabilities
Source:
Springer Online Journal Archives 1860-2000
Topics:
Sociology
,
Economics
Notes:
Abstract No-arbitrage is the fundamental principle of economic rationality which unifies normative decision theory, game theory, and market theory. In economic environments where money is available as a medium of measurement and exchange, no-arbitrage is synonymous with subjective expected utility maximization in personal decisions, competitive equilibria in capital markets and exchange economies, and correlated equilibria in noncooperative games. The arbitrage principle directly characterizes rationality at the market level; the appearance of deliberate optimization by individual agents is a consequence of their adaptation to the market. Concepts of equilibrium behavior in games and markets can thus be reconciled with the ideas that individual rationality is bounded, that agents use evolutionarily-shaped decision rules rather than numerical optimization algorithms, and that personal probabilities and utilities are inseparable and to some extent indeterminate. Risk-neutral probability distributions, interpretable as products of probabilities and marginal utilities, play a central role as observable quantities in economic systems.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1007/BF00132993
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