The lecture critiques neoclassical finance for relying on objective probability and cardinal utility derived from repeated gambles (frequency theory) to model rational behavior in single-event scenarios where uncertainty is fundamental. It identifies the Capital Asset Pricing Model (CAPM) as a theoretical construct based on unrealistic assumptions of investor homogeneity, homogeneous expectations, and frictionless borrowing/lending at a risk-free rate, which collapses when individual trading signals are introduced. The core mechanism involves maximizing expected utility under constraints using systematic risk (beta), yet admits that this equilibrium framework vanishes if realistic market frictions and heterogeneous beliefs are acknowledged.
The lecture critiques neoclassical finance for relying on objective probability and cardinal utility derived from repeated gambles (frequency theory) to model rational behavior in single-event scenar…