A system theoretic approach to behavioral finance

The purpose of this paper is to study a particular example of a feedback system modelling the behavior of agents in financial markets. The agent's decision is based on his beliefs of the price dynamics and his behavior reflecting his attitude, such as risk aversion or risk preference. The convergence of the resulting iterative procedure is examined. A data driven stochastic approximation procedure for estimating the price dynamics is suggested. Simulation results for various behaviors are also presented.