The use of "fully articulate" models in finance is not always a logical possibility. A simple "counting argument" shows that the agents of our models must be less complex than the whole model and less complex than ourselves. Some markets are influenced by "Big Players," individuals with discretionary power to influence market results. A fully articulate model of such a market would require a fully articulate model of the Big Player. This is not possible. Thus, there are limits to knowledge in finance. Sometimes finance researchers must settle for mere "explanation of the principle." Because there are limits to knowledge in finance, we should take another look at some techniques of analysis other than fully articulate models. Perhaps it is only natural that in the exuberance generated by the successful advances of science the circumstances which limit our factual knowledge, and the consequent boundaries imposed upon the applicability of theoretical knowledge, have been rather disregarded. It is high time, however, that we take our ignorance more seriously.
ASJC Scopus subject areas
- Economics and Econometrics