Chapter 4: The Science of Investment
INTRODUCTION The legitimacy of the investment discipline is inextricably linked to its scientific credentials. Questioning the scientific status of investment, although controversial, is fundamentally important given the enormous scale of capital entrusted to financial fiduciaries, and society’s reliance upon financial markets to provide optimal economic outcomes. Even within the academy (and without incredulity induced by the episodic crises of financial markets) there is considerable skepticism about the practical value of research work. For example, Frankfurter and McGoun (1996, p. 5) assert that finance is ‘a social science masquerading as a natural science,’ arguing that its capacity to generate real knowledge (meaning) is diminished by the emphasis placed upon collecting data and statistical techniques which do not have sufficiently rigorous philosophical justification (that is, a scientific methodology).1 The emphasis on statistical/econometric methods used within the investment discipline does encourage a propensity for pseudo-scientific research, but this is an evergreen concern which also applies to economics and the other social sciences: Mayer (1933, p. 419), for example, enjoined scholars in economics, generally, to eschew ‘pseudo-scientific reasoning and sophistry.’ Ascertaining the scientific status of the investment discipline therefore requires a synthesis of the extant literature to address questions of epistemology (the scope of the research) and ontology (what knowledge has been derived). This is a necessarily complicated procedure that must take into account the relevant literature and the research methodologies employed. This chapter therefore classifies the extant literature according to the principal ‘research paradigms,’ and summarizes their respective research methods...
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