Game theory is central to understanding human behavior and relevant to all of the behavioral sciences–from biology and economics, to anthropology and political science. However, as The Bounds of Reason demonstrates, game theory alone cannot fully explain human behavior and should instead complement other key concepts championed by the behavioral disciplines. Herbert Gintis shows that just as game theory without broader social theory is merely technical bravado, so social theory without game theory is a handicapped enterprise.
Gintis illustrates, for instance, that game theory lacks explanations for when and how rational agents share beliefs. Rather than construct a social epistemology or reasoning process that reflects the real world, game theorists make unwarranted assumptions which imply that rational agents enjoy a commonality of beliefs. But, Gintis explains, humans possess unique forms of knowledge and understanding that move us beyond being merely rational creatures to being social creatures. For a better understanding of human behavior, Gintis champions a unified approach and in doing so shows that the dividing lines between the behavioral disciplines make no scientific sense. He asks, for example, why four separate fields–economics, sociology, anthropology, and social psychology–study social behavior and organization, yet their basic assumptions are wildly at variance. The author argues that we currently have the analytical tools to render the behavioral disciplines mutually coherent.
Combining the strengths of the classical, evolutionary, and behavioral fields, The Bounds of Reason reinvigorates the useful tools of game theory and offers innovative thinking for the behavioral sciences.
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Every day, the financial markets bravely price trillions of dollars in such risky securities as stocks, bonds, options, futures, and derivatives. The systematic determination of their values–asset pricing–has developed dramatically in the last few years due to advances in financial theory and econometrics. In one of the most highly anticipated books in financial economics, John Cochrane unifies and brings this science up to date for the benefit of advanced students and professionals.
Cochrane traces the pricing of all assets back to a single idea–price equals expected discounted payoff–that captures the macroeconomic risks underlying each security’s value. By using a single, stochastic discount factor rather than a separate set of tricks for each asset class, Cochrane builds a unified account of modern asset pricing. He presents applications to stocks, bonds, and options. Each model–consumption-based, CAPM, multifactor, term structure, and option pricing–is derived as a different specification of the discount factor.
The discount factor framework also leads to a state-space geometry for mean-variance frontiers and asset pricing models. It puts payoffs in different states of nature on the axes rather than mean and variance of return, leading to a new and conveniently linear geometrical representation of asset pricing ideas.
Cochrane approaches empirical work with the Generalized Method of Moments, which studies sample average prices and discounted payoffs to determine whether price does equal expected discounted payoff. He translates between the discount factor, GMM, and state-space language and the beta, mean-variance, and regression language common in empirical work and earlier theory. The book also includes a review of recent empirical work on return predictability, value and other puzzles in the cross section, and equity premium puzzles and their resolution.
Written to be a summary for academics and professionals as well as a textbook for advanced graduate students, this book condenses and advances recent scholarship in financial economics.
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Tags: Behavioral, behavioral disciplines, Bounds, Game, game theorists, psychology study, rational creatures, Reason, Sciences, social creatures, social epistemology, sociology anthropology, stocks bonds options futures, Theory, understanding human behavior, Unification, unwarranted assumptions