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Financial Market Dynamics and Human Behavior


Course Description

This course develops a new perspective on the dynamics of financial markets and the roles that human behavior and the business environment play in determining the evolution of behavior and institutions. Although neoclassical economic theories such as expected utility maximization, rational expectations, general equilibrium, and efficient markets have dominated the literature on economic behavior and market structure, recent advances in the cognitive neurosciences, artificial intelligence, computational social science, and evolutionary biology provide a number of new insights into market dynamics. We draw on these diverse disciplines to develop a more complete understanding of human behavior in the specific context of financial markets and other industries and businesses, known as the Adaptive Markets Hypothesis. Academic research will serve as the foundation of the course, but the main focus will be practical applications of these ideas drawn from the finance, insurance, biotech, pharmaceutical, and other industries, as well as government regulation and policy making initiatives. Using this new perspective, we formulate several new hypotheses regarding recent challenges to traditional financial thinking, including: how financial crises are formed and whether or not they can ever be eliminated; why certain investment strategies seem to wax and wane; where business cycles come from; what role ethics and culture play in financial intermediation; whether capitalism is more sustainable than other political systems; ESG and impact investing, and how we can maximize impact by applying financial engineering to some of society’s biggest challenges such as cancer, climate change, pandemics, poverty, and renewable energy.

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  4. Requirements

    15.401, 15.414, or 15.415