Complex Decision-Making in Economy and Finance

11Underlying Mechanisms in Finance

11.1. Introduction to finance theory and its evolution

In a section devoted to market equilibrium and market efficiency, we have focused on the fact that, more and more often, dynamic pricing is governed by scientific approaches. This is what we have developed in the procurement department at IBM France. Also, in some large companies where we provided consulting, we introduced technologies like game theory, regenerative methods such as simulated annealing or genetic algorithms in the decision-making systems. However, these business optimization approaches do not allow us to prevent and avoid crises. It is therefore of key importance to understand how a company is evolving over time, how a crisis can be avoided and how a collapse can be anticipated.

In parallel, in economy, the Fribourg Group was set up to develop the field of econophysics with their associated technologies. Since the 1980s, game theory has become a large part of economic theory, but it is largely restricted to studies of Nash equilibria, which (by Nash’s own design) is a neo-classical idea. Economic systems are instead complex and not amenable to any imaginable equilibrium analysis.

Hereafter, we remind how we can manage a market, efficiency, within the new constraints required by demand to improve the dynamic pricing techniques, and introduce some rationality in such a process.

Figure 11.1. Dynamic pricing based on a supply–demand diagram (source: https://en.wikipedia.org/wiki/File:Supply-demand-right-shift-demand.svg ...