Finance and Financial Economics: A Philosophy of Science Perspective

In this chapter, we introduce topics in finance and financial economics that should be of interest to philosophers of science and philosophers of economics, in particular. The chapter is divided in two parts. In the first part, we briefly discuss key elements of modern finance: the joint hypothesis problem as a problem of underdetermination and event studies as a method to cope with it; the relation between science and ideology; the performativity of financial models; and the role of models in finance as benchmarks or normative guidelines. In the second part, we delve deeper into the practice-oriented role of models. We focus on the influential model by Franco Modigliani and Merton Miller on the cost of capital to suggest that values held by modelers can often be the driving force of their model building and of the models’ potential relevance. Thus, values, we suggest, should be part of the philosophical appraisal of models, as opposed to the much narrower attention to their explanatoriness.