Saturday, 18 February 2017

Finance and Financial Economics: A Debate About Common Sense and Illogical Models

By Pablo Fernandez 

This document tries to answer to a frequent question of students and clients: are Finance and Financial Economics the same thing? My answer is NO: I think that they are very different, although the terms are very often confused and many Finance professor positions in many Business Schools have been filled with Financial Economists.

Two ways, among others, to see the differences: a) attend a class on “Finance for managers” taught by a sensible Finance professor and attend another taught by a “Financial Economist”; b) read a book on “Finance for managers” and another on “Financial Economics”.

Financial Economics is a subject developed by economists whose main purpose is to elaborate “models” based on unrealistic assumptions. The conclusions and predictions of the “models” have very little to do with the real world: companies, financial markets, investors, managers… the most emblematic example is the CAPM.

The most used word in the Nobel Prize lectures of Fama, Shiller, Hansen and Sharpe was “model” (513 times).

This document contains facts and some opinions held by the author. I welcome comments (disagreements, errors, anecdotes…) that will help the readers and me to better differentiate between Finance and Financial Economics.

Download the paper here.

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