How Do Conflicting Theories About Financial Markets Coexist?
41 Pages Posted: 12 Apr 2006
Date Written: April 10, 2006
There are many conflicting interpretations of security prices and price determination in financial markets. They range from academic theories based on efficient markets and rational expectations hypotheses, to more traditional methods of fundamental analysis, to theories of "value" and "growth" investing, to chart-reading and technical analysis, to notions such as "reflexivity." These interpretations are logically inconsistent with each other, but they seem to co-exist, sometimes even on the same trading desk. In this paper, we seek to formulate an explanation for this strange coexistence, using some tools from critical theory to understand how financial markets operate. Structuralism is used to analyze various kinds of narratives appearing in the financial literature, which are intended to have explanatory force, and appearance of sometimes contradictory elements in such narratives; post-structuralism is used to explain the way in which contradictory interpretations co-exist. We discuss some practical implications for security valuation, option valuation, trading strategies, market risk management, and volatility estimation.
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