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A major update to this increasingly relevant topic.
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'''Epistemology of finance''' is a field of study that aims at providing a conceptual framework for the interpretation of mathematical models in [[finance]], in order to determine the [[epistemology|epistemological]] standards according to which financial theory must be assessed.<ref>{{cite web |url=http://jpe.ro/pdf.php?id=2865 |title=The epistemology of modern finance |author=Xavier De Scheemaekere |date=2009 |publisher=The Journal of Philosophical Economics |pages=99–120}}</ref> Subjects covered include the study of [[financial crisis]]<ref>{{Cite journal|url = http://lawweb.usc.edu/why/students/orgs/ilj/assets/docs/19-2%20Lipshaw.pdf |title=The epistemology of financial crisis: complexity, causation, law and judgement |date=February 24, 2010 |publisher=Southern California Interdisciplinary Law Journal |volume=19 |page=299 |last=Lipshaw |first=Jeffrey M.}}</ref> as well as the epistemology of [[financial reporting]].<ref>{{cite web |url=http://eprints.soton.ac.uk/35752/ |title=Reflections of the epistemology of financial reporting |date=2002 |author=Napier, Christopher J. |publisher=University of Southampton}}</ref>
'''Epistemology of finance''' is a broad and largely disconnected field of study that aims at providing a conceptual framework(s) for the interpretation of mathematical models in [[finance]] as well as the study of their possible limitations, in order to determine the [[epistemology|epistemological]] standards according to which financial theory should be assessed against any associated empirical reality.<ref>{{cite web |url=http://jpe.ro/pdf.php?id=2865 |title=The epistemology of modern finance |author=Xavier De Scheemaekere |date=2009 |publisher=The Journal of Philosophical Economics |pages=99–120}}</ref><ref>{{Cite report |url=https://www.econstor.eu/handle/10419/22744 |title=Recursivity and Self-Referentiality of Economic Theories and Their Implications for Bounded Rational Actors |last=Lehmann-Waffenschmidt |first=Marco |last2=Sandri |first2=Serena |date=2007 |publisher=Dresden Discussion Paper Series in Economics |issue=03/07}}</ref>


Within applied financial disciplines (which subsume [[financial economics]] and [[Quantitative finance|quantitative]] and [[statistical finance]]) a single common assumption is pervasive; namely, that capital markets, being social systems, adhere sufficiently to epistemic norms. The eminent heterodox economist Tony Lawson noted in 2003 how pervasive incorrect epistemological assumptions are in economics.<ref>{{Cite journal |last=Lawson |first=Tony |date=2013-06-01 |title=Soros' Theory of Reflexivity: a critical comment: |url=https://www.cairn.info/revue-de-philosophie-economique-2013-1-page-29.htm?ref=doi |journal=Revue de philosophie économique |volume=Vol. 14 |issue=1 |pages=29–48 |doi=10.3917/rpec.141.0029 |issn=1376-0971}}</ref> These assumed epistemic norms carry with them ''a priori'' the necessity of unique, well-defined causal chains that can be meaningfully extracted from data in a positive economics framing and a reductionist scientific sense.<ref name=":0">{{Cite journal |last=Polakow |first=Daniel A. |last2=Gebbie |first2=Tim |last3=Flint |first3=Emlyn |date=2023 |title=Epistemic Limits of Empirical Finance: Causal Reductionism and Self-Reference |url=https://www.ssrn.com/abstract=4646664 |journal=SSRN Electronic Journal |language=en |doi=10.2139/ssrn.4646664 |issn=1556-5068}}</ref> Both [[Heterodox economics|heterodox]] and [[mainstream economics]] retain the view that causality remains relevant as a formalism<ref>{{Cite journal |last=Shaikh |first=Anwar |date=2013 |title=On the role of reflexivity in economic analysis |url=http://www.tandfonline.com/doi/abs/10.1080/1350178X.2013.859414 |journal=Journal of Economic Methodology |language=en |volume=20 |issue=4 |pages=439–445 |doi=10.1080/1350178X.2013.859414 |issn=1350-178X}}</ref>, and typically characterizes empirical finance as [[science]].<ref>{{Cite journal |last=Lopez de Prado |first=Marcos |date=2015 |title=The Future of Empirical Finance |url=http://www.ssrn.com/abstract=2609734 |journal=SSRN Electronic Journal |language=en |doi=10.2139/ssrn.2609734 |issn=1556-5068}}</ref>
It is closely related to [[philosophy and economics]].

The alternative ‘reflexive’ view, dates back to the ‘Oedipus effect’ of Popper<ref>{{Cite journal |last=Gardiner |first=Patrick |last2=Popper |first2=Karl R. |date=1959 |title=The Poverty of Historicism. |url=https://academic.oup.com/pq/article-lookup/doi/10.2307/2216437 |journal=The Philosophical Quarterly |volume=9 |issue=35 |pages=172 |doi=10.2307/2216437}}</ref>, in control theory as the study of second-order cybernetics<ref>{{Citation |last=von Foerster |first=Heinz |title=On Constructing a Reality |date=2003 |work=Understanding Understanding |pages=211–227 |url=http://link.springer.com/10.1007/0-387-21722-3_8 |access-date=2024-04-03 |place=New York, NY |publisher=Springer New York |language=en |doi=10.1007/0-387-21722-3_8 |isbn=978-0-387-95392-2}}</ref> and also features in economics with Kauffman's Eigenform of markets.<ref>{{Cite web |last=Kauffman |first=Louis |date=2009 |title=Reflexivity and Eigenform: The Shape of Process |url=https://homepages.math.uic.edu/~kauffman/ReflexPublished.pdf}}</ref> MacKenzie noted that the study of economics does more than simply describe, but rather shapes and changes the conditions of the economy, and society more broadly.<ref>{{Cite book |last=MacKenzie |first=Donald |url=https://direct.mit.edu/books/book/2002 |title=An Engine, Not a Camera: How Financial Models Shape Markets |date=2006 |publisher=The MIT Press |isbn=978-0-262-27880-5 |language=en |doi=10.7551/mitpress/9780262134606.001.0001}}</ref><ref>{{Cite journal |last=Klaes |first=Matthias |date=2009 |title=Do economists make markets? On the performativity of economics, edited by Donald MacKenzie, Fabian Muniesa, and Lucia Siu. Princeton University Press, 2007, 371 pages. |url=https://www.cambridge.org/core/product/identifier/S0266267109990332/type/journal_article |journal=Economics and Philosophy |language=en |volume=25 |issue=3 |pages=389–397 |doi=10.1017/S0266267109990332 |issn=0266-2671}}</ref> George Soros is one of the most ardent supporters of the reflexivity paradigm.<ref>{{Cite journal |last=Soros |first=George |date=2013 |title=Fallibility, reflexivity, and the human uncertainty principle |url=http://www.tandfonline.com/doi/abs/10.1080/1350178X.2013.859415 |journal=Journal of Economic Methodology |language=en |volume=20 |issue=4 |pages=309–329 |doi=10.1080/1350178X.2013.859415 |issn=1350-178X}}</ref>

It has been argued that the implications of reflexivity have yet to be adequately assimilated in policy intervention, financial regulation or investments.<ref name=":0" />

Subjects covered include the study of of complexity and [[complexity theory]], [[financial crisis]]<ref>{{Cite journal |last=Lipshaw |first=Jeffrey M. |date=2010 |title=The epistemology of financial crisis: complexity, causation, law and judgement |url=http://lawweb.usc.edu/why/students/orgs/ilj/assets/docs/19-2%20Lipshaw.pdf |journal=Southern California Interdisciplinary Law Journal |publisher=Southern California Interdisciplinary Law Journal |volume=19 |page=299}}</ref> as well as the epistemology of [[financial reporting]].<ref>{{cite web |url=http://eprints.soton.ac.uk/35752/ |title=Reflections of the epistemology of financial reporting |date=2002 |author=Napier, Christopher J. |publisher=University of Southampton}}</ref>

It is closely related to [[philosophy and economics]], [[financial market efficiency]], [[Rational expectations|rational expectation theory]] and the study of [[Causality]].


== See also ==
== See also ==
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== Further reading ==
== Further reading ==
* {{cite journal |last=Bolanos |first=Fernando Arbelaez |date=2004 |ssrn=1776138 |title=Finance and epistemology |publisher=Universidad Externado de Colombia}}
* {{cite journal |last=Bolanos |first=Fernando Arbelaez |date=2004 |ssrn=1776138 |title=Finance and epistemology |journal=SSRN |publisher=Universidad Externado de Colombia}}
* {{Cite journal|title = Evolution in Finance Research: Epistemology, Paradigm and Critics|ssrn = 1389863|date = 2009-01-30|first1 = Robert Aldo|last1 = Iquiapaza|first2 = H. F.|last2 = Amaral|first3 = Aureliano Angel|last3 = Bressan}}
* {{Cite journal |title=Evolution in Finance Research: Epistemology, Paradigm and Critics |journal=SSRN |ssrn=1389863 |date=2009 |first1=Robert Aldo |last1=Iquiapaza |first2=H. F. |last2=Amaral |first3=Aureliano Angel |last3=Bressan}}
* {{Cite web|title = The Transatlantic – Journal of Economics and Philosophy " Epistemology of Economics|url = http://thetransatlantic.org/category/epistemology/|website = thetransatlantic.org|access-date = 2015-11-08|archive-url = https://web.archive.org/web/20160304041917/http://thetransatlantic.org/category/epistemology/|archive-date = 2016-03-04|url-status = dead}}
* {{Cite web|title = The Transatlantic – Journal of Economics and Philosophy " Epistemology of Economics|url = http://thetransatlantic.org/category/epistemology/|website = thetransatlantic.org|access-date = 2015-11-08|archive-url = https://web.archive.org/web/20160304041917/http://thetransatlantic.org/category/epistemology/|archive-date = 2016-03-04|url-status = dead}}
* {{Cite web|title = History and epistemology of finance |url =http://www.fmsh.fr/en/c/1159|website = fmsh.fr|date =10 September 2013|access-date=2015-11-08}}
* {{Cite web|title = History and epistemology of finance |url =http://www.fmsh.fr/en/c/1159|website = fmsh.fr|date =10 September 2013|access-date=2015-11-08}}

Revision as of 13:53, 3 April 2024

Epistemology of finance is a broad and largely disconnected field of study that aims at providing a conceptual framework(s) for the interpretation of mathematical models in finance as well as the study of their possible limitations, in order to determine the epistemological standards according to which financial theory should be assessed against any associated empirical reality.[1][2]

Within applied financial disciplines (which subsume financial economics and quantitative and statistical finance) a single common assumption is pervasive; namely, that capital markets, being social systems, adhere sufficiently to epistemic norms. The eminent heterodox economist Tony Lawson noted in 2003 how pervasive incorrect epistemological assumptions are in economics.[3] These assumed epistemic norms carry with them a priori the necessity of unique, well-defined causal chains that can be meaningfully extracted from data in a positive economics framing and a reductionist scientific sense.[4] Both heterodox and mainstream economics retain the view that causality remains relevant as a formalism[5], and typically characterizes empirical finance as science.[6]

The alternative ‘reflexive’ view, dates back to the ‘Oedipus effect’ of Popper[7], in control theory as the study of second-order cybernetics[8] and also features in economics with Kauffman's Eigenform of markets.[9] MacKenzie noted that the study of economics does more than simply describe, but rather shapes and changes the conditions of the economy, and society more broadly.[10][11] George Soros is one of the most ardent supporters of the reflexivity paradigm.[12]

It has been argued that the implications of reflexivity have yet to be adequately assimilated in policy intervention, financial regulation or investments.[4]

Subjects covered include the study of of complexity and complexity theory, financial crisis[13] as well as the epistemology of financial reporting.[14]

It is closely related to philosophy and economics, financial market efficiency, rational expectation theory and the study of Causality.

See also

References

  1. ^ Xavier De Scheemaekere (2009). "The epistemology of modern finance". The Journal of Philosophical Economics. pp. 99–120.
  2. ^ Lehmann-Waffenschmidt, Marco; Sandri, Serena (2007). Recursivity and Self-Referentiality of Economic Theories and Their Implications for Bounded Rational Actors (Report). Dresden Discussion Paper Series in Economics.
  3. ^ Lawson, Tony (2013-06-01). "Soros' Theory of Reflexivity: a critical comment:". Revue de philosophie économique. Vol. 14 (1): 29–48. doi:10.3917/rpec.141.0029. ISSN 1376-0971. {{cite journal}}: |volume= has extra text (help)
  4. ^ a b Polakow, Daniel A.; Gebbie, Tim; Flint, Emlyn (2023). "Epistemic Limits of Empirical Finance: Causal Reductionism and Self-Reference". SSRN Electronic Journal. doi:10.2139/ssrn.4646664. ISSN 1556-5068.
  5. ^ Shaikh, Anwar (2013). "On the role of reflexivity in economic analysis". Journal of Economic Methodology. 20 (4): 439–445. doi:10.1080/1350178X.2013.859414. ISSN 1350-178X.
  6. ^ Lopez de Prado, Marcos (2015). "The Future of Empirical Finance". SSRN Electronic Journal. doi:10.2139/ssrn.2609734. ISSN 1556-5068.
  7. ^ Gardiner, Patrick; Popper, Karl R. (1959). "The Poverty of Historicism". The Philosophical Quarterly. 9 (35): 172. doi:10.2307/2216437.
  8. ^ von Foerster, Heinz (2003), "On Constructing a Reality", Understanding Understanding, New York, NY: Springer New York, pp. 211–227, doi:10.1007/0-387-21722-3_8, ISBN 978-0-387-95392-2, retrieved 2024-04-03
  9. ^ Kauffman, Louis (2009). "Reflexivity and Eigenform: The Shape of Process" (PDF).
  10. ^ MacKenzie, Donald (2006). An Engine, Not a Camera: How Financial Models Shape Markets. The MIT Press. doi:10.7551/mitpress/9780262134606.001.0001. ISBN 978-0-262-27880-5.
  11. ^ Klaes, Matthias (2009). "Do economists make markets? On the performativity of economics, edited by Donald MacKenzie, Fabian Muniesa, and Lucia Siu. Princeton University Press, 2007, 371 pages". Economics and Philosophy. 25 (3): 389–397. doi:10.1017/S0266267109990332. ISSN 0266-2671.
  12. ^ Soros, George (2013). "Fallibility, reflexivity, and the human uncertainty principle". Journal of Economic Methodology. 20 (4): 309–329. doi:10.1080/1350178X.2013.859415. ISSN 1350-178X.
  13. ^ Lipshaw, Jeffrey M. (2010). "The epistemology of financial crisis: complexity, causation, law and judgement" (PDF). Southern California Interdisciplinary Law Journal. 19. Southern California Interdisciplinary Law Journal: 299.
  14. ^ Napier, Christopher J. (2002). "Reflections of the epistemology of financial reporting". University of Southampton.

Further reading


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