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Evolutionary finance suggests a model of portfolio selection and asset price dynamics that is explicitly based on the ideas of investors’ heterogeneity, dynamics and changes, learning and a natural selection of strategies. However, the traditional, new institutional and the behavioral finance models all share one important feature: They are all based on the notion of a representative agent even though this mythological figure is dressed differently. In contrast, behavioral finance completely challenges the rationality assumption and aims to improve the understanding of financial markets by assuming that, due to psychological factors, investors’ decisions will contradict the expected utility theory. By comparison, the new institutional economics approach attempts to provide a more realistic picture of economic processes, even in financial markets, by postulating several market imperfections, including the agents’ limited rationality.
#Pecunia potentia meaninig update#
The traditional financial paradigm seeks to understand financial markets by using models in which markets are perfect, which includes agents who are “rational” and update their beliefs correctly based on new information. Using the University of Massachusetts hedge fund database, we show some funds with superior records and from this evaluation learn more about the properties of the DSSR and the modified downside symmetric information ratio (DISR). This measure only counts losses and is useful in evaluating superior investors such as the Renaissance Medallion hedge fund which has a high rating by the modified downside symmetric Sharpe ratio as opposed to a modest rating with the ordinary Sharpe ratio. Earlier, Ziemba (2005), following an idea in Ziemba and Schwartz (1991), proposed a modification of the ordinary normal distribution based Sharpe ratio to evaluate right skewed great investor portfolios.
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These include some Kelly criterion investors such as Buett, Keynes and Soros who have concentrated portfolios with few asset positions. Some investors prefer high long run growth and accept bumps, rather than smooth wealth paths and lower growth. Their graphs of wealth over time leads us to a search for smooth monotone paths and how we might fairly evaluate superior as opposed to average investors. We discuss the records of some great investors and hedge fund managers.
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