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Financial markets exist to disperse the risks of an unknown future in an economy. But for this process to work in an optimal fashion, investors – and subsequently markets – must have a way to interpret uncertainty. The investor rationality and market efficiency literature utilizes a methodology inadequate to address this fact, so I supplement it with the perspectives of epistemology, economic sociology, neuroscience, cognitive science, and philosophy of mind. This approach suggests that what is commonly viewed as market “inefficiency” is not necessarily caused by investor irrationality, but rather by the inherent nature of the epistemological problem faced by investors. I propose the Reflexive Market Hypothesis to describe how markets, despite their seeming deviations from efficiency, are efficient in the computational sense.
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Pikelny, Steven, "Reflexivity in Financial Markets: A Neuroeconomic Examination of Uncertainty and Cognition in Financial Markets" (2011). Senior Projects Spring 2011. 4.
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