Compelled by the hard problem of asset pricing, I have abandoned equilibrium theory with rational expectations in search for a more promising land. I might have found it in systems theory with bounded rationality. The hard problem is as follows: If demand and supply just intersect at equilibrium, why, then, does the consumption CAPM fail, but the investment CAPM succeed in the data? In retrospect, I was trying to have the cake and eat it too. I was treating efficient markets as virtually identical as equilibrium theory with rational expectations. However, while interpreting the investment CAPM literature as defending efficient markets, I have ignored the broad failure of the consumption CAPM in the cross section. A big thank-you to my interlocutor. In a parallel universe, without being called out as "a bit misleading" with the investment CAPM, I would still be in my dogmatic slumber. In this universe, alerted by the hard problem, I have been foraging far and wide from my home habitat of equilibrium theory. And diverse hints are pointing me toward systems theory. The standard theory (equilibrium) is built on the following ontological presuppositions:
The systems theory rides on a different set of ontological presuppositions:
In my presentation at EDHEC Speaker Series, I explain why after 20 years of defending equilibrium theory, I have no choice left but to leave it behind in pursuit of systems theory. To solve the hard problem of asset pricing is my urge. And the socialist calculation debate is my phase transition. Please see slides and video recording below. I am very grateful to Prof. Hamid Boustanifar for the kind invitation.
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Lu Zhang
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