Occupy Wall Street: Another Sign of Impending Change?

Change Financial Theory and You Change Financial Practice

Changes to modern finance theory (MFT) are afoot and Seven Pillars Institute wants to provide thinking space for the change.

For over fifty years MFT has been dominant. The theory instructs us that free markets are efficient, good, and better if left alone. Underpinning the theory are the three, now questionable, assumptions: economic agents are rational, self-interested, and profit-maximizers. These assumptions have come to pervade our world-view.

We have become what we were assumed to be.

There is a hole in MFT – the theory does not account for ethics. MFT, as was the intellectual fashion for most of the twentieth century, is positivistic, that is, value-free.

But MFT is a young theory – with an expiration date.

The time is coming for a paradigm shift towards a financial theory that incorporates ethics. We see a small amount of synthesis occurring in behavioral finance, but theoreticians remain wary of ethics. Intellectual fashion takes its time in changing.

The push for a transformation in MFT comes from an evolution in our world-view.

We see the stirrings for change in the inchoate but growing movement of Occupy Wall Street. While the movement cannot articulate with precision its demands, it wants, among other things, change in the way finance is conducted, and thus to the ideas that animate financial theory.

We see the slow stirrings for change in Ed Miliband’s speech at the Labour Conference. Mr. Miliband spoke of “right values” and “wrong values” and called for the end of “irresponsible capitalism”.

We see the stirrings for change in mainstream media with its focus on stories about and data on income inequality and other failings of financial capitalism. These examples are all part of a gradual (some would say, glacial) attitudinal change. When the environment becomes supportive, financial researchers and theoreticians will finally feel comfortable and perhaps, encouraged, to develop new theories that will synthesize finance with ethics.