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Framing FinanceThe Boundaries of Markets and Modern Capitalism$
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Alex Preda

Print publication date: 2009

Print ISBN-13: 9780226679310

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226679334.001.0001

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Financial Knowledge and the Science of the Market

Financial Knowledge and the Science of the Market

(p.82) Chapter Three Financial Knowledge and the Science of the Market
Framing Finance

Alex Preda

University of Chicago Press

This chapter examines the emergence and consequences of a vernacular “science of financial investments.” While many eighteenth-century writers saw financial knowledge as devilish and destructive (centered upon the bodily and verbal skills required by street transactions), these new authors set out to build a science of investments grounded in observation and calculation. Among the main outcomes of this process are the rationalization of investor behavior and the representation of financial markets as supra-individual, quasi-natural entities, which cannot be controlled by any group. It is the latter notion which allowed for the shift to price behavior as the core actor of abstract market models. The effort to transform investment knowledge into a science is crowned by the formulation of basic views of the random walk hypothesis. The first mathematical formulation of the random walk hypothesis plays a decisive role in the development of mathematical finance (more specifically, of the options pricing theory). The main tenet of the random walk hypothesis is that securities prices move independently of each other, and that future movements do not depend on past movements. One of the most important implications of this hypothesis is that in the long run, the market cannot be controlled by any group or person.

Keywords:   financial knowledge, financial markets, street transactions, science of investments, investor behavior, price behavior, mathematical finance, random walk hypothesis, options pricing theory, mathematical formulation

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