The Implications of Our Evolutionary Perspective for Distributional Form

As we have highlighted on a number of occasions throughout this book, distributional form is important. For starters, the ubiquitous Gaussian distributional form underpins the entire edifice of financial engineering techniques that characterize the “traditionalist” thought paradigm — a point already expanded upon in considerable detail in Chapter 2. This distributional form does have its limitations, but as we have also mentioned, it is insufficient to criticize something without at least attempting to offer an alternative. Does our own unique view of Evolutionary Finance provide any insight as to an alternative distributional form? The good news is that “yes it does.” The even better news is that this (Game Theoretic based/informational sequence driven) distributional form provides a fundamentally more credible approximation of the intrinsic forces determining the distribution of asset price movements than does the “white noise”/IID (independent and identically distributed) driven assumptions that constitute the Gaussian foundations of the traditionalist perspective.