Framing Complexity in Financial Markets

Abstract

Financial markets are complex: Factors that affect their development and the associations between these factors are not clearly assignable. Nevertheless, every day thousands of investors face the task of mastering the complexity of the markets. How do they solve this problem in their daily practice? This paper discusses this question by investigating a special area of the capital markets, namely, portfolio management. Two possible methods of handling the complexity of financial markets are presented: first, the qualitative methods (heuristics), and second, the formal (mostly computer-assisted) models. The central finding of the paper is the high heterogeneity of the applied methods. There are free spaces that portfolio managers can use while framing complex market situations. It could be suggested that this diversity contributes to the emergence and self-preservation of the market complexity. This contribution is dedicated to the empirical argument for these mechanisms.