infonet-economy

The creation and protection of financial wealth is one of the most important roles of modern societies. People will commit to working hard and saving for future generations only if they can be sure that the efforts they exert every day will be rewarded by a better standard of living. This, however, can only be achieved with a well-functioning financial market. Unfortunately, a breakdown of the financial system as in the great financial crisis of 2007 and 2008 destroys the trust in this important social arrangement. To avoid such crises we need to improve our understanding of financial markets that, so far, has been built on totally unrealistic assumptions about the behavior of people acting in them. The most fundamental and at the same time the most questionable in modern economic theory is the hypothesis of full rationality of economic agents who are assumed to maximize their utility functions subject to their individual constraints, or in mathematical language, solve well-defined and precisely stated constrained optimization problems.