A Necessary Limitation on Models of Capital and Capital Markets

Abstract

The principal models in finance contain the implicit assumption that people invest money with the belief they will make a profit. This implicit assumption, when made explicit, gives rise to contradictions in the derivation of these models as they currently exist. As such, existing models fail to predict many observed behaviors and indeed many contradictions appear in the literature. Making the assumption of profitability explicit is necessary in modeling human behavior. The Capital Asset Pricing Mode, Arbitrage Pricing Theory and Ito Calculus based models for derivative pricing contain a mathematical contradiction corrected by this model and they are false by contradiction.