Application of Fuzzy Set Theory to Finance Research: Method and Application

Abstract

The impact of implicit “Fuzziness” is inevitable due to the subjective assessment made by investors. Human judgment of events may be significantly different based on individuals’ subjective perceptions or personality tendencies for judgment, evaluation and decisions; thus human judgment is often fuzzy. So we will use the fuzzy set theory to describe and eliminate the “fuzziness” that is the subjective assessment made by investors. Due to the fluctuation of the financial market from time to time, in reality, the future state of a system might not be known completely due to lack of information, so investment problems are often uncertain or vague in a number of ways. The traditional probability financial model does not take into consideration the fact that investors often face fuzzy factors. Therefore, the fuzzy set theory may be a useful tool for modeling this kind of imprecise problem. This theory permits the gradual assessment of the membership of elements in relation to a set; this is described with the aid of a membership function valued in the real unit interval (0, 1). The fuzzy set theory allows the representation of uncertainty and inexact information in the form of linguistic variables that have been applied to many areas. The application of the fuzzy set theory to finance research is proposed in this article.