Applications of Heuristics in Finance

Abstract

Having the optimal solution for a given problem is crucial in thecompetitive world of finance; finding this optimal solution, however,is often an utter challenge. Even if the problem is well definedand all necessary data are available, it is not always well behaved:rather simple constraints are often enough to prohibit closed formsolutions or evade the reliable application of standard numericalsolutions. A common way to avoid this difficulty is to restate theproblem: restricting and cumbersome constraints are relaxed and simplifyingassumptions are introduced until the revised problem is approachablewith the available methods, and are afterwards superimposed ontothe solution for the simplified problem. Unfortunately, subtletiesas well as central properties of the initial problem can be lostin this process, and results assumed to be ideal can actually befar away from the true optimum.