Financial Economics: What Kind of Science Is It?

Abstract

Abstract The chapter provides a roadmap for how philosophers of science can engage more with financial economics. It argues that financial economics is best characterized by its use of models and its performative nature. This is demonstrated by focusing on the Capital Asset Pricing Model (CAPM), the centre-stage model of asset pricing that enjoys enduring popularity in academic research and industry practice. Assessing the epistemic performance of financial economics, the chapter argues that the model-based and performative character of financial economics is: (1) visible in the history of its emergence and its current scientific practice; (2) central to the kind of insights it aims to generate; and (3) key to understand what kind of ethical values are at play. The questions emerging from these issues are fertile ground for further research in the emerging field of the philosophy of science of financial economics.