(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.
