Theory and Practice in Financial Markets
prof. Uskali Mäki and prof. Deirdre McCloskey
When thinking about the relationship of science and the world, financial markets provide an interesting case study. Finance is a relatively young academic discipline. It has emerged only in the last fifty years as an interdisciplinary endeavor, growing and developing into a prominent, distinct field. Academic finance always has had a close relation with financial markets: formal theories and models are part of the practice. These overlaps bring up some interesting questions. These questions form the core of this research project. The possible answers will always be backed up by actual experiences in the markets.
Given its initial successes, is finance still well equipped to deal with today’s issues in financial markets? That requires an analysis of the methodology in finance. And are there other ways of thinking about financial markets that are potentially interesting? Behavioral finance has rapidly gained prominence as an alternative for neoclassical inspired finance. An attempt will be made to assess both these programs by observing and analyzing actual professional investment behavior of academic scholars. Nowadays also sociological approaches to finance and financial markets are showing up. One of the claims made from that corner is, that finance theory is performative, i.e. it shapes and alters the reality it is intending to describe. The performativity claim merits attention because it may challenge conventional ways of thinking about science and reality. A final school of thought that will be investigated is that of Austrian economics, in particular market process theory, as an attempt to add descriptive validity to finance theory.
Ultimately, the goal of this project is twofold. First, to provide a richer, thicker account of what goes on in financial markets, grounded in what actually goes on in practice. Second, it aims to serve as a detailed case study in the philosophy of economics and the philosophy of science in general.