Abstract:
Although the finance field has experienced paradigm shifts, traditional finance is an essential step for analyzing the new perspectives in financial markets. This thesis will first explore traditional finance and the related concepts of efficient market hypothesis (EMH) and expected utility theory.
The EMH relies on the axiom that, at any time, stocks prices reflect all the available information so that they provide a perfect image of the intrinsic value of the company. The expected utility theory, instead, is based on mathematical models that, moving from the requirement of perfect rationality of economic agents, assume a strong predictive and normative character.
Traditional finance has been the dominant paradigm for about thirty years. With time, however, empirical evidence and anomalies have undermined it, giving birth to new perspectives focused on man as being irrational and characterized by a strong empirical connotation. Among these new theories, the analysis will focus on behavioral finance, developed as a reaction to traditional finance and the axiom of perfect rationality. In such section some of the main cognitive distortions that affect decision making are also examined.
Finally, these different perspectives on markets will be placed close to each other. The picture of the market that results confirms both points of view. However, each is valid under different conditions.
