Controversies of neoclassical finance theory, the response of the behavioral school, and agent-based models

Abstract

The purpose of this paper is to present some controversies related to mainstream Finance, the response associated with Behavioral Finance and the features of the based-agent computational economics. In the first section, we discuss some of the main foundations of Conventional Finance, such as CAPM and market efficiency. The following section evaluates the Behavioral Finance Theory according to the two pillars this theory is based on, namely limits to arbitrage and cognitive psychology of decision making. The third section presents the main features of computational economics and its contributions to financial theory. It can be noted that an integration between the last two approaches might happen in the future due to the real assumptions of both these schools and the sort of analysis of the agent-based economics.