Review of Behavioral Economics > Vol 12 > Issue 2

The Free Energy Principle in Financial Markets: In Praise of “Noise Trading”

Samer Adra, Sheffield University Management School, UK, samer.adra@sheffield.ac.uk
 
Suggested Citation
Samer Adra (2025), "The Free Energy Principle in Financial Markets: In Praise of “Noise Trading”", Review of Behavioral Economics: Vol. 12: No. 2, pp 173-190. http://dx.doi.org/10.1561/105.00000208

Publication Date: 24 Mar 2025
© 2025 S. Adra
 
Subjects
Behavioral finance,  Financial markets
 
Keywords
JEL Codes: D91, G41
Financial marketsbehavioral financenoise tradingFree Energy PrinciplebeliefsMarkov Blankets
 

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In this article:
Introduction 
Markets, Prices, and Noise 
The Free Energy Principle: Unifying Action and Perception in Financial Markets 
Adaptive and Spillover Effects of Free Energy Minimization 
Conclusion and Implications for Personal Finance 
References 

Abstract

Individual investors frequently deviate from the principles of neoclassical finance by engaging in practices such as stock picking, trend following, and market timing. Such behavior is often deemed suboptimal. This article proposes an alternative perspective using Karl Friston’s Free Energy Principle. It suggests that these seemingly suboptimal actions are integral components of a broader process aimed at balancing action with perception. Active and frequent engagement with financial markets entails leveraging the informational and risk-balancing nature of such markets to receive feedback, facilitate learning, and adjust internal models to align with the external environment. The market-driven alignment between action and perception fosters a more adaptive interaction between individuals and their environment.

DOI:10.1561/105.00000208