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The naturalistic turn in economics: implications for the theory of finance

  • Herrmann-Pillath, Carsten

Economics is increasingly adopting the methodological standards and procedures of the natural sciences. The paper analyzes this 'naturalistic turn' from the philosophical perspective on naturalism, and I discuss the implications for the field of finance. The theory of finance is an interesting case in point for the methodological issues, as it manifests a paradigmatic tension between the pure theory of finance and Behavioral Finance. I distinguish between three kinds of naturalism: mark I, the reduction of behavior on psychoneural phenomena, mark II, the transfer of patterns of causal explanations from the natural sciences to the social sciences, mark III, the enrichment of the ontology from observer-independent to observer-relative facts. Building an integrated naturalistic paradigm from these three ingredients, I show that naturalism in economics will only be completed by a simultaneous linguistic turn, with language being analyzed from the naturalistic viewpoint. I relate this proposition with recent results of research into finance, especially connecting Behavioral Finance with the sociology of finance.

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Paper provided by Frankfurt School of Finance and Management in its series Frankfurt School - Working Paper Series with number 105.

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Date of creation: 2008
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Handle: RePEc:zbw:fsfmwp:105
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  1. Sugden, Robert, 2000. "Team Preferences," Economics and Philosophy, Cambridge University Press, vol. 16(02), pages 175-204, October.
  2. Greif, Avner, 1994. "Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 912-50, October.
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  9. van der Sar, Nico L., 2004. "Behavioral finance: How matters stand," Journal of Economic Psychology, Elsevier, vol. 25(3), pages 425-444, June.
  10. Faruk Gul & Wolfgang Pesendorfer, 2005. "The Case for Mindless Economics," Levine's Working Paper Archive 784828000000000581, David K. Levine.
  11. Donald MacKenzie, 2006. "An Engine, Not a Camera: How Financial Models Shape Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262134608, June.
  12. Earl, Peter E, 1990. "Economics and Psychology: A Survey," Economic Journal, Royal Economic Society, vol. 100(402), pages 718-55, September.
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