The Virtues and Vices of Equilibrium and the Future of Financial Economics

@article{Farmer2009TheVA,
  title={The Virtues and Vices of Equilibrium and the Future of Financial Economics},
  author={J. Doyne Farmer and John Geanakoplos},
  journal={Yale Economics Department Research Papers},
  year={2009}
}
The use of equilibrium models in economics springs from the desire for parsimonious models of economic phenomena that take human reasoning into account. This approach has been the cornerstone of modern economic theory. We explain why this is so, extolling the virtues of equilibrium theory; then we present a critique and describe why this approach is inherently limited, and why economics needs to move in new directions if it is to continue to make progress. We stress that this shouldn't be a… 
The Economic Crisis is a Crisis for Economic Theory
This article examines, in the light of recent events, the origins of the difficulties that current macroeconomic models have in encompassing the sort of sudden crisis which we are currently
THE (UNFORTUNATE) COMPLEXITY OF THE ECONOMY
This article is a follow-up of a short essay that appeared in Nature 455 1181 (2008). It has become increasingly clear that the erratic dynamics of markets is mostly endogenous and not due to the
Time and symmetry in models of economic markets
These notes discuss several topics in neoclassical economics and alternatives, with an aim of reviewing fundamental issues in modeling economic markets. I start with a brief, non-rigorous summary of
Foundations of complexity economics
| Conventional, neoclassical economics assumes perfectly rational agents (firms, consumers, investors) who face welldefined problems and arrive at optimal behaviour consistent with — in equilibrium
Foundations of complexity economics
TLDR
This Perspective sketches the ideas of complexity economics and describes how it links to complexity science more broadly.
Complexity Economics : A Different Framework for Economic Thought
This paper provides a logical framework for complexity economics. Complexity economics builds from the proposition that the economy is not necessarily in equilibrium: economic agents (firms,
From Edgeworth to econophysics: a methodological perspective
Although most of the marginalist economists' methodology was influenced by nineteenth-century classical physics, the work of Francis Ysidro Edgeworth represents the highest point of classical physics
The History of Economics and the Pre-History of Econophysics: Boltzmann versus the Marginalists
Given the acknowledged influence of classical physics on the development of neoclassical economic theory, the emergence of the ‘new’ subject of econophysics in the mid-1990's poses a methodological
Reflexive Expectation Formation
How do economic agents form expectations regarding prices, when there is a fundamental uncertainty about the market process, like in or after financial crises? How does the formation of expectations
The role of economy in the philosophy of the society
Summary The economic prosperity is an important factor for the amelioration of the quality of life of people and societies, but it is not the main factor of human wellbeing and happiness, since
...
...

References

SHOWING 1-10 OF 230 REFERENCES
MACROECONOMICS AND REALITY
Existing strategies for econometric analysis related to macroeconomics are subject to a number of serious objections, some recently formulated, some old. These objections are summarized in this
On the Dynamic Behavior of Prices in Disequilibrium
SATISFIED AS WE MAY BE with the overall efficiency of the market system and with the tenets of the perfect market model, we all viscerally know that were we down on the market floor we would
Disequilibrium Foundations of Equilibrium Economics
The most common mode of analysis in economic theory is to assume equilibrium. Yet, without a proper theory of how economies behave in disequilibrium, there is no foundation for such a practice. The
An evolutionary theory of economic change
This study develops an evolutionary theory of the capabilities and behavior of business firms operating in a market environment. It includes both general discussion and the manipulation of specific
Alfred Marshall on economic biology
This article examines the sequence of ideas which led Marshall to conclude that economic growth is organic in nature and that its analysis must be based on a bilogical not a mechanical analogue. At
Market Force, Ecology, and Evolution
In financial markets, an excess of buying tends to drive prices up, and an excess of selling tends to drive them down. This is called market impact. Based on a simplified model for market making, it
Frontiers of finance: evolution and efficient markets.
  • J. Farmer, A. Lo
  • Economics
    Proceedings of the National Academy of Sciences of the United States of America
  • 1999
TLDR
The Efficient Markets Hypothesis is described and how this controversial idea has stimulated a number of new directions of research, some focusing on more elaborate mathematical models that are capable of rationalizing the empirical facts, others taking a completely different tack in rejecting rationality altogether.
CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*
One of the problems which has plagued thouse attempting to predict the behavior of capital marcets is the absence of a body of positive of microeconomic theory dealing with conditions of risk/
Scaling and criticality in a stochastic multi-agent model of a financial market
Financial prices have been found to exhibit some universal characteristics that resemble the scaling laws characterizing physical systems in which large numbers of units interact. This raises the
On the Impossibility of Informationally Efficient Markets
If competitive equilibrium is defined as a situation in which prices are such that all arbitrage profits are eliminated, is it possible that a competitive economy always be in equilibrium? Clearly
...
...