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Financial Models and Society

Villains or Scapegoats?

Ekaterina Svetlova

This innovative book employs the social studies of finance approach which aims to enhance the dialogue between finance and sociology by addressing the blind spots of economic and financial theories. In so doing, it challenges the accusations made towards financial models in the aftermath of the last economic crisis and argues that they cannot be condemned indiscriminately. Their influence on markets and society is not straightforward, but determined by the many ways in which models are created and then used. Ekaterina Svetlova analyses the various patterns of the application of models in asset management, risk management and financial engineering to demonstrate that their power is far more fragile than widespread criticism would indicate.
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Chapter 4: Financial models in decision-making

Villains or Scapegoats?

Ekaterina Svetlova

Extract

Following the theoretical discussions in Chapters 2 and 3, here I present numerous empirical accounts of financial model use in decision-making. I particularly focus on several styles of model use, that is, on how models are applied to overcome uncertainty and make investment decisions possible for model users. I classify and compare various patterns of model use in financial markets (“qualitative overlay”, “backing out” and models as “opinion proclaimers”) and discuss in detail the different latent functions of models. I show that, as models are combined with, “overlaid” and influenced by judgment, stories, emotions and the institutional environment in which they are applied, they are far less omnipotent than one might expect. The related model risks are also discussed in detail.

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