Standard finance stand on the arbitrage principles of Miller & Modigliani, the portfolio principles of Markowitz, the capital asset pricing theory of Sharpe, Lintner & Black, and the option-pricing theory of Black, Scholes & Merton. These approaches consider markets to be efficient and are highly normative and analytical.
Modern financial economic theory is based on the assumption that the representative market actor in the economy is rational in two ways: the market actor makes decisions according to the axiom of expected utility theory and makes unbiased forecasts about the future. According to the expected utility theory a person is risk averse and the utility function of a person is concave, i.e. the marginal utility of wealth decreases. Assets prices are set by rational investors and, consequently, rationality based market equilibrium is achieved. In this equilibrium securities are priced according to the efficient market hypothesis.
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