A revolution in finance?

Abstract

This paper investigates the nature of the academic field of finance as it looks in the early 21st century. Using Kuhn’s structure of scientific revolutions as a framework, the paper examines the development of the field over the last 50 years with particular emphasis on intellectual shifts in the last decade: shifts emanating from cross-disciplinary research that are manifesting in approaches at odds with the traditional rational expectations paradigm. These approaches are based on previously disparate fields, such as psychology, neuroscience, evolutionary biology, and sociology. By critically examining the nature of the new approaches, the article determines whether they indeed offer ‘alternative’ paradigms as claimed. In light of the variation of these new approaches, the paper also makes a case for finance to engage more meaningfully in dialogue on epistemological issues and engage in self-appraisal as a force for change and innovation.

Fifty years of finance research in the Asia Pacific Basin

“…Gippel () argues that the field of finance is now entering a period of extraordinary science and this is also argued in O'Brien (). Already the qualitative research studies of Allen (), Kaczynski et al .…”

“…In this section, we classify the published research in the key Asia Pacific journals in terms of the Kuhnian concepts of ‘normal science’, ‘anomalies’ and ‘extraordinary science’ . Gippel () characterises finance research into (i) ‘pre science’: prior to 1960s; (ii) ‘transition to science’: 1960s and 1970s; (iii) ‘normal science’: 1970s, 1980s and 1990s; (iv) ‘anomalies’ in the 1970s and 1980s; and (v) ‘extraordinary science’: 1990s and 2000s. Given that the Asia Pacific journals start in the 1970s, we mostly expect to find the periods of normal science, anomalies and extraordinary science in the articles examined.…”

A simple template for pitching research

“…One useful angle on novelty is to consider what compatible concepts/approaches exist in other fields that might have new traction when combined in your chosen area – see Gippel () for a broad discussion of such influences in a ‘revolution’ in finance.…”

Why does research in finance have so little impact?

“…Financial market dynamics are sometimes argued to be too sophisticated to be amenable to accurate mathematical modelling (Fabozzi et al, 2014, p. 15). Many of the fundamental tenets of modern finance theory, such as the value of diversification, the use of variance or value-at-risk as risk measures, the efficiency of markets, and the rationality of financial market participants, have all come into increasing question since the financial crisis, yet no radically different approaches have emerged as a result (Gippel, 2013).…”

“…Critics within the academic community have noted the over quantification of finance research (Bennis & O'Toole, 2005), that neoclassical finance is producing 'nothing new' (Gippel, 2013) and the use of abstract models bearing no resemblance to reality (Krugman, 2009) while others exhort the field to expand quantitative empirical work beyond pre-existing large databases to listen to practitioners (Salmona et al, 2015). More worryingly, the volume of research relating to ethics in finance is very low compared to other areas within business (Bernadi et al, 2008), and evidence that ethics has been generally ignored (Horrigan, 1987) is indicated by the fact that none of finance's 'top' 40 journals or the journals listed in Cabell (2004) indicate an interest in ethics research (Bernadi et al, 2008).…”