Finance models as metaphors |
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Authors: | Elton G McGoun |
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Institution: | Department of Management, Bucknell University, Lewisburg, PA 17837, USA |
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Abstract: | Quantitative models in the social science of finance such as the Capital Asset Pricing Model (CAPM) and the Black-Scholes Option Pricing Model (OPM) are metaphors. They cannot be applied literally, but do provide us with figurative knowledge—an epistemologically meaningful form that might legitimately be called a “useful framework,” as the CAPM is commonly referred to in textbooks. This paper describes the scientific value of metaphors and discusses why the OPM ought to be seen as one and what this might mean. As a result of finance research and the development of what has been called “modern finance theory,” of which the CAPM and OPM are important parts, we can certainly understand financial relationships much better, but that “understanding” is quite different from what our research methods imply that it is. |
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Keywords: | Derivatives Options Metaphors Modeling |
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