THE THEORY OF EFFICIENT MARKETS AND A MODEL OF RATIONAL INVESTOR – FROM CONDITIONS OF RISK TO TERMS OF CONFLICT

• Main Author: Krzysztof Dobrowolski
• Format: Article
• Language: English
• Published: University of Gdansk 2014-03-01
• Series: Contemporary Economy
• Subjects: theory of efficient markets; rational investor; risk; uncertainty; ignorance; terms of conflict
• Online Access: http://www.wspolczesnagospodarka.pl/?p=734

The theoretical assumption about the informative effectiveness of financial markets is very important, although the discussion about its compatibility with the reality still re-mains open. The article summarises the key elements of the theory of efficient markets, paying particular attention to the adopted in this theory assumption about a rational inves-tor, which also appears in other models and theories related to the financial markets (such as capital asset pricing model CAPM or Markowitz Portfolio Theory). The views on the way and criteria for decision-making by a rational investor have changed over the centu-ries. Today, the dominant theory in this regard is the theory of expected utility. However, it characterizes the decision-making process under risk conditions, which are not the most common economic environment, particularly in an economy subjected to the process of globalisation. Thus, the problem of using the models of decision making under conditions of uncertainty, ignorance and terms of conflict in the efficient market theory and the theo-ry of expected utility is under consideration in the final part of the article.