Benutzer:Ferikali/Cognitive finance
Cognitive finance
What is understood by ‘cognitive finance’ is a new, highly interdisciplinary approach to explaining complex processes in economics and capital markets. The etymological origins of the term ‘cognitive finance’ go back to the cognitive doctrines of ancient philosophy and the enlightenment; in its modern version – which is relevant for our current purposes – it unites the latest findings in the fields of neuroscience, psychology and modern cognitive science into an integrated explanatory model.[1]
Cognitive finance primarily addresses the problem of limited human cognitive ability and places this in a systemic context. Scientific studies from a range of different disciplines show that human beings are prone to systematic limitations, distortions and errors (cognitive deficits) when it comes to their ability to acquire and process information and to make decisions. These deficits are characteristic of human action in real life; the possible effects of these deficits therefore determine elementary processes in the economy, society and the capital markets. If we can understand these processes as elements within a networked system, we begin to obtain an extensively modified picture of reality. This new picture is similar to dynamic models of system theory and follows the fundamental assumptions of what is known as ‘complexity research’.
Cognitive finance thus opens up a new cognitively focused view of real systems and processes, especially – but not only – with regard to economics and the capital markets.
Objectives
The primary objective of cognitive finance is the integrated analysis, description and explanation of real-world processes in economics and in capital markets. It is based on a special analytical system which explicitly includes neuronal limitations, cognitive deficits and behaviours attributable to bounded rationality. The approach also combines the fundamentals of evolutionary biology, complexity research and system theory.[3]
Cognitive finance represents a fundamental criticism of traditional models and paradigms of current economic and capital market theories. As recent history clearly shows, established models suffer from significant explanation deficits. This is mainly due to unrealistic or erroneous basic assumptions, including the ‘rational expectations’ and ‘efficient markets’ postulates.[4] The secondary objective of cognitive finance, therefore, is to overcome erroneous paradigms in the field of economics, which facilitates a new view of economics and financial markets.[5]
Starting points for paradigm shifts
Cognitive finance seeks to spearhead the long overdue paradigm shift in economic theory. The basis for this is a more realistic, cognitively aware appreciation of what it is to be human and a thoroughly dynamic understanding of markets and market processes. The key starting points for cognitive finance, therefore, can be found on two levels closely linked with each other: ‘human beings’ and ‘market’.[6] ‘Market’: In contrast to orthodox economic theory, markets – and entire national economies, for that matter – are not mechanisms with an inherent tendency towards stability or even equilibrium. Rather, they are highly complex and dynamic processes that are constantly changing and evolving. Modern complexity research provides some important basic insights into these processes. It offers easily comprehensible reasons why markets are subject to cyclical fluctuations, bubbles, crashes and other – previously difficult to recognise – phenomena. A crucial factor in this is the nature of human action which, given its heterogeneous characteristics and constant adaptation – reinforced by cognitive deficits – is incapable of being ‘rational’.[7] ‘Human beings’: This level of analysis focuses on a new understanding of human action, informed by the findings of cognitive theory and what is known as ‘neuroscience’. Modern brain research has produced some astonishing findings regarding how the human brain, human consciousness and human behaviour function. Factors such as memory, shaping, the subconscious mind, emotion, ‘instinct’ and ‘intuition’ which, from the perspective of orthodox economics, are ‘irrelevant’, are shown to be powerful drivers of human action. They play a significant role in shaping the perception, processing and interpretation of information, not to mention the genesis and sequencing of the decision-making processes that follow.[8]
The basis for a long overdue paradigm shift in economics is therefore the readiness to accept the reality of human action as being the result of factors and limitations that are inherently cognitive and neurobiological in nature. The approaches adopted by what is generally referred to as ‘behavioural economics’ have already highlighted some important paths leading in this direction in recent years.
Figure 1: Illustration of the evolution of previous paradigms of capital market theories.
