(The following is based on my initial and brief impressions of the quality of academic writing in finance. I may change my mind later)
I’ve been reading through (the introductions) of very many articles in finance these past two weeks. The more I read, the more I realise that in finance the truth is a very murky prospect. In physics it seems like the truth is more stable (although physicists have a nasty habit of confusing their “theories” with reality. They seem to forget when their theories are shown to be wrong that they ever thought of them as Gospel). But in finance, if you find two papers that agree, they probably share an author.
I am pretty sure that all these papers have one thing in common: they are all wrong. But every author is confident of his conclusions. References to why their results may be spurious are rare. Hardly ever do authors mention that their underlying assumptions are completely wrong – it seems standard to just rely on run-of-the-mill statistical methods, which I cannot believe take into account the wild randomness of the markets. Very few seem to care.
Academics in finance needs to be a little more humble. I think every paper should contain a disclaimer:
“The results in this paper are only valid under the assumptions of the methods used. These assumptions are almost certainly violated. The conclusions in this paper are disputed. Please do not confuse what is presented here with the truth.”
Some tips for academics:
- Write very clearly the underlying assumptions are – don’t just use methods without being very clear what it is they assume.
- If you’re using a method outside of an area in which it is (proven) valid, write it in CAPS LOCK, because otherwise you’re a fraud, a charlatan.
- Show how the assumptions are violated (note I used “how” not “if”) – not just speculation, I want to see statistical tests and diagrams.
- Please reference everyone who disagrees with you. They’re not right either, but at least we know where to look for alternatives.
- Stop being so sure of yourself.
Readers of anything in finance (of academic journals, of The Economist, etc.) should consider that anything can be challenged. There is no absolute truth. If there is, we cannot discover it, which amounts to the same thing. Live in a state of scepticism of everything you read. It isn’t fun – but the alternative, as Voltaire would say, is absurd.