Why Finance Needs Philosophy (and Vice Versa): Some Epistemic and Methodological Issues

Abstract

AbstractAs the world economy has for better or worse become more and more dependent on the financial markets, a rethinking of the role of finance in both theory and practice is necessary. I argue that such a rethinking requires a new look at the theories of finance that is philosophical in kind. In effect, as Martha Nussbaum claims, if the absence of philosophy in economics is arguably one of the main reasons for the flaws in certain economic theories, the absence of philosophy in finance is one the main reasons for the flaws in our theories on financial systems. In this paper I discuss the mutual relations and benefits between finance and philosophy. First, I examine the contribution that philosophy can offer to finance by analyzing a few critical issues in financial ontology (Section 2.1), financial methodology (Section 2.2) and financial mathematics (Section 2.3). I argue that philosophy is essential to enabling finance to achieve the goals for which it was designed, not only because it is a valuable external addition, but also internally, since philosophy is the proper tool for bringing about new theories and approaches. Then, I examine the contribution that finance can offer to philosophy by analyzing the relationship between theory and practice (Section 3.1), data and hypothesis (Section 3.2), and prediction, description and control (Section 3.3) in the context of financial systems. I argue that finance can help us to rethink some philosophical tenets on these issues.