This paper investigates modern finance’s epistemological status with a special emphasis on its most quantitative part: Black-Scholes option pricing model and its extensions. It zeroes on the analysis of mathematical methods in financial economics and their connection to risk and uncertainty. Risk-neutral valuation, a direct consequence of Black-Scholes model, restricts the range of individual and subjective uncertainty by putting a price on replicable risk, thereby conferring to modern finance a unique kind of objectivity in pricing assets, as opposed to any speculative assessment. Yet, in another sense, this objectivity is only relative for it has no direct connection to the real world, nor any causal or predictive power, for modern finance ultimately deals with uncertainty itself. The paper sheds light on the articulation of these contrasting aspects.
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Paper provided by Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) in its series Working Papers CEB with number
06-017.RS.
Find related papers by JEL classification: B16 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Quantitative and Mathematical G12 - Financial Economics - - General Financial Markets - - - Asset Pricing G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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