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Framing Finance: A Methodological Account

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  • Sheila C Dow

    ()
    (University of Stirling)

Abstract

The way in which financial markets are framed depends on who is doing the framing, although there are reflexive interdependencies between these framings. Mainstream economics frames financial markets as archetypical competitive markets, focusing on prices as the key information on which to base analysis. This follows from traditional positivist methodology where computability is the key to theory appraisal. Central banks draw on this analysis for their own framing, but modify it significantly in the face of the requirement to take decisions under palpable uncertainty; some understanding is perceived to be necessary for prediction. Participants in financial markets in turn employ quantitative models for forming their expectations; in conditions of market turbulence the limits to these models become evident, and indeed material to prices themselves. Further, for these participants, markets are a social phenomenon. Finally the households and firms whose experience of financial markets enables or constrains spending frame financial markets in yet another way. The underlying argument of the paper is that the way in which financial markets are framed in theory should reflect the different framings in the economy, and that this would benefit from input from other disciplines.

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Bibliographic Info

Paper provided by Post Keynesian Economics Study Group (PKSG) in its series Working Papers with number PKWP1308.

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Length: 16 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:pke:wpaper:pkwp1308

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Keywords: framing; finance; monetary policy;

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  1. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," NBER Working Papers 13189, National Bureau of Economic Research, Inc.
  2. Hong, Harrison & Stein, Jeremy, 2007. "Disagreement and the Stock Market," Scholarly Articles 2894690, Harvard University Department of Economics.
  3. Alex Preda, 2007. "The Sociological Approach To Financial Markets," Journal of Economic Surveys, Wiley Blackwell, vol. 21(3), pages 506-533, 07.
  4. Victoria Chick & Sheila Dow, 2005. "The meaning of open systems," Journal of Economic Methodology, Taylor & Francis Journals, vol. 12(3), pages 363-381.
  5. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  6. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
  7. Mackenzie, Donald, 2006. "Is Economics Performative? Option Theory and the Construction of Derivatives Markets," Journal of the History of Economic Thought, Cambridge University Press, vol. 28(01), pages 29-55, March.
  8. Esther-Mirjam Sent, 2004. "Behavioral Economics: How Psychology Made Its (Limited) Way Back Into Economics," History of Political Economy, Duke University Press, vol. 36(4), pages 735-760, Winter.
  9. Nava Ashraf & Colin F. Camerer & George Loewenstein, 2005. "Adam Smith, Behavioral Economist," Journal of Economic Perspectives, American Economic Association, vol. 19(3), pages 131-145, Summer.
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