Publication Date: September 1998
Traditional ﬁnance theory based on the assumptions of symmetric information and perfect and competitive markets has provided many important insights. These include the Modigliani and Miller Theorems, the CAPM, the Eﬀicient Markets Hypothesis and continuous time ﬁnance. However, many empirical phenomena are diﬀicult to reconcile with this traditional framework. Game theoretic techniques have allowed insights into a number of these. Many puzzles remain. This paper argues that recent advances in game theory concerned with higher order beliefs, informational cascades and heterogeneous prior beliefs have the potential to provide insights into some of these remaining puzzles.
Published in Chatterjee and Samuelson, eds., Advanced in Business Applications of Game Theory, Kluwer Academic Press, 2001