The financial crisis and the failure of modern social science

Purpose - The aim of this paper is to explore the lessons offered by the financial crisis about the appropriate epistemological approaches to apply in the study of human affairs in general, and of the financial markets in particular.Design methodology approach - The paper applies a qualitative and h...

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Bibliographic Details
Published in:Qualitative research in financial markets 2011-10, Vol.3 (3), p.177-192
Main Author: Bragues, George
Format: Article
Language:English
Subjects:
17th century
Economic crisis
Epistemology
Experimental methods
Prices
Quantitative analysis
Regression analysis
Research methodology
Science
Social sciences
Studies
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Summary:Purpose - The aim of this paper is to explore the lessons offered by the financial crisis about the appropriate epistemological approaches to apply in the study of human affairs in general, and of the financial markets in particular.Design methodology approach - The paper applies a qualitative and historical approach invoking debates in the philosophy of social science to dominant themes and concepts in modern quantitative finance. It is argued that underlying the theory and practice of modern quantitative finance is a commitment to an empiricist epistemology modeled on the natural sciences.Findings - In the financial crisis, modern social science, with its positivist quantitative orientation, was put to the test in a way that it had never been before. That it failed this test is one of the chief lessons of the financial crisis. Mathematical techniques are inherently incapable of accounting for human behaviour. The crisis serves to underline that a fundamental divide exists between the natural and human realms.Practical implications - While the mathematical-positivist techniques continue to hold some promise in the study of finance, it has become obvious that this dominant approach needs be enhanced by more qualitative techniques.Originality value - The paper shows that although in popular media outlets the mathematization of finance has been singled out as a cause of the crisis, the broader implications for the analysis of human activity have not yet been probed. Nor, in the wake of the crisis, has there been a systematic, philosophically informed, critique of the positivist-quantitative orientation buttressing academic research into the financial markets.
ISSN:1755-4179
1755-4187
DOI:10.1108/17554171111176903