Edited by Jan Toporowski and Jo Michell
Chapter 30: The methodology of finance
The methodology of finance is crucial to the field. The way in which financial markets and behaviour are analysed depends on the methodological approach taken to building knowledge. This methodological approach includes both the methods of enquiry and the principles by which some theories are judged to be better than others. But in finance there is more reflexivity than normal, in that finance theory and modelling directly inform and guide actual market behaviour. Therefore the methodology of finance theory carries over into the methodology of practice. For example, we have seen in the financial crisis that broke in 2007 that the methodology of finance, particularly the reliance on quantitative models, was a major contributor to the situation, as well as colouring the way in which the crisis was then analysed. Ultimately the methodology of finance is determined by the way in which the real practice of finance is understood, and thus framed. This framing then determines the form of the analysis and the way in which practice itself is organized.
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