Finance, Mathematics & Philosophy
1. Summary
2. Description
3. Calendar
4. Rules and procedures
5. Rules of debate (Disputationes)
6. Resources
7. Award
8. Organizers and tutors
9. Finale to the workshop: Finance, Mathematics & Philosophy Conference, 12-13 June 2014
The ascent of finance caused various reactions ranging from hostility motivated by the idea that finance, being based on the lending of money, is a parasite on the real economy, to euphoria fed by the notion that lending to deserving and innovative businesses results in virtuous economic circles and widespread well-being. The workshop will examine finance especially in relation to mathematics and philosophy. In particular it will examine some of the most employed and effective hypotheses put forward to explain the behavior of financial markets. This examination will take a philosophical perspective aiming at investigating the assumptions and the methods used by these hypotheses. Furthermore the workshop will focus on the role of mathematics, and physics, in the modelling and forecast the behavior of stock markets. The workshop comprises debate between four teams made up of students of physics, mathematics and philosophy. These teams have to defend distinct and even conflicting theoretical positions with the help of the selected resources. In order to this, the workshop will employ logic and an adapted version of the rules of the medieval debates (disputatio) to investigate some of the main hypotheses on stock markets. It will aim at building arguments in favor of and against a given hypothesis, at evaluating its consistency, and detecting hidden controversial assumptions, possible fallacies and non sequiturs. Specifically, the workshop will investigate the following four hypotheses:
- the efficient markets hypothesis;
- the reflexive markets hypothesis;
- the financial instability hypothesis;
- the financial econophysics hypothesis.
The workshop will end up with a finale, i.e. an international conference that will be held in June 2014 at Villa Mirafiori – Department of Philosophy - Sapienza University of Rome, during which the invited speakers will present their findings and will debate with the students.
The teams are the following:
- Team 1. Efficient Markets Hypothesis. Tutor: Giulia Miotti Members (9): Bracale Marcantonio, Francesco Procaccio, Ida Severino, Natasha Campana (Mathematics), Ginevra Crollalanza (Mathematics), Luca Bruschi (Mathematics), Gianluca Fabrizi, Renata De Luca (Mathematics), Giulio Ginnetti
- Team 2. Reflexive Markets Hypothesis. Tutor: Antonio Ristori Members (9): Lucia Frontera, Giovanni Mazzanti (Mathematics), Giulia Cinque, Simone Tocco, Claudio Abramo (Economics), Costantina Costopoulos, Paolo Barucca (Phd student - Physics), Marika Catini (Philosophy), Giacomo Scettri (Physics)
- Team 3. Financial Instability Hypothesis. Tutor: Eleonora De Caroli Members (9): Fedeli Andrea, Eugenio Luciano, Giuliano Bernardini, Ilaria Sabatino (Mathematics), Tania Berardi (Mathematics), Michela ianiro (Mathematics), Federica Galdi, Givanni Cometto, Tiberi Mauro
- Team 4. Financial Econophysics Hypothesis. Tutor: Rossella Carapellese Members (7): Lorenzo Migliorato, Valentina Taddeo, Giulia Bilotta, Claudia Cusseddu (Mathematics), Vittorio Maio (Mathematics), Eleonora Dolente (Mathematics), Morena Manco (Mathematics), Alessandra Occelli (Mathematics).
Finance originated and was developed as a technological innovation to create a means to transfer money from those who possess it to those who need it, assuming an increasingly important role in the evolution and life of western civilization. The ascent of finance caused various reactions ranging from hostility motivated by the idea that finance, being based on the lending of money, is a parasite on the real economy, to euphoria fed by the notion that lending to deserving and innovative businesses results in virtuous economic circles and widespread well-being. The study of finance examines the decision-making processes that affect the money supply under conditions of uncertainty. Thus finance examines two variables: money and the future. In effect, investors distribute their funds to financial assets in order to reach their goals, and businesses and governments raise funds to sustain their operations. Finance aims at offering a means of taking decisions on how to raise money and how to use it once obtained. The best-known tool for this is the stock market. The workshop will examine finance especially in relation to mathematics and philosophy. In particular it will examine some of the most employed and effective hypotheses put forward to explain the behavior of financial markets. This examination will take a philosophical perspective aiming at investigating the assumptions and the methods used by these hypotheses. Furthermore the workshop will focus on the role of mathematics, and physics, in the modelling and forecast the behavior of stock markets. Sometimes the philosophical assumptions of these hypotheses are explicit. For instance George Soros’ theory moves from a Popperian view on social phenomena (i.e. fallibilism, Oedipic effect, etc.). The econophysics-based approach put forward by Didier Sornette relies on emergentism. Benoit Mandelbrot’s theory challenges the general principle of the continuity of nature. In other cases the assumptions are less explicit, but equally relevant for the theory, such as the mechanical hypothesis inside the neoclassical approach put forward by Friedman and Fama. Following Steve Keen’s footsteps, we will see if and to what extent these hypotheses are cogent and consistent. One of the main theoretical problems in finance, and in the social sciences in general as argued by Flanagan, is its ‘reflexive’ quality, that is the fact that a prediction, and hence an expectation, is able to affect and change the system which it is formulated for. This is arguably one of the greatest differences between the subject studied in the social sciences, where systems are able to learn and are reflexive, and the natural sciences, where systems do not exhibit such features. This fact makes it very difficult to evaluate a financial hypothesis by means of a comparison between its predictions and the events that happen in reality, as the latter can be affected by the former. In particular, as Sornette reminds us, a prediction when released into a financial system (e.g. the forecast that a crash of about 15-25% will occur in five weeks), will generate one of the following three scenarios depending on the threshold of how many investors believe the prediction:
- a) not enough investors believe it, which then is useless, and the market drops just as predicted. Even if this seems a victory for the hypothesis that generates the prediction, criticism can define it as ‘lucky one’, which does not have any statistical significance.
- b) A sufficient number of investors believe it, who adjust their strategies accordingly and the bubble vanishes: the crash does not occur and the forecast is self-refuting.
- c) A lot of investors believe it, causing panic, and the market drops as a consequence. So the forecast is self-fulfilling and its success is due to the effect of the panic rather than to the predictive power of the hypothesis.
These scenarios are problematic for the theory which the forecast is based on: in (a) and (c) the crash is not avoided, while in (b) the forecast is self-refuting and accordingly the theory turns out to be unreliable. This feature seems to be the defining property of the learning and reflexive systems and raises the problem of scientific responsibility, in particular the responsibility to publish scientific findings. While scientists have this responsibility, the issue becomes much more complex when they have to take into account the potential effect of that publication in society. The stock markets exemplify this problem and its complexity. The workshop will examine the role of mathematics and physics in the modeling of stock markets, ranging from the idea that they are not effective (and indeed harmful as argued for instance by a great player like Buffett) to the idea that they are crucial, as they make it possible to forecast some critical behavior patterns of stock markets, as argued by Sornette, passing through the idea that mathematics is not bad, but that neoclassical mathematics is narrow, as pointed out for instance by John M. Keynes, Steve Keen and Ping Chen. Finally, the workshop will employ logic and an adapted version of the rules of the medieval debates (disputatio) to investigate some of the main hypotheses on stock markets. It will aim at building arguments in favor of and against a given hypothesis, at evaluating its consistency, and detecting hidden controversial assumptions, possible fallacies and non sequiturs. Specifically, the workshop will investigate the following four hypotheses:
- the efficient markets hypothesis;
- the reflexive markets hypothesis;
- the financial instability hypothesis;
- the financial econophysics hypothesis.
We will explore these hypotheses discussing well-known bubbles and crashes. N.B. There are other important hypotheses, namely the AMH (Adaptive Markets Hypothesis), the SBH (Social Bubble Hypothesis), and the Economic Complexity Hypothesis, which won’t be explicitly covered in the workshop, but which are listed and explained in a nutshell in the resources page (see other suggested resources) and will covered in the finale to the workshop.
- 14 January 2014, 10:00-13:00, room II: Introduction and formation of the teams
- 27 February 2014, 10:30-12:30, room II: Team Efficient Market Hypothesis (tutor: G. Miotti)
- 14 March 2013, 16:30-18:30, room II: Team Reflexive Markets Hypothesis (tutor: Antonio Ristori)
- 15 April 2014, 17:30-19:30, room XI: Team Econophysics (tutor: Rossella Carapelles)
- 16 May 2014, 16:30-18:30, room II: Team Financial Instability Hypothesis (tutor: Eleonora De Caroli)
- 12-13 June 2014 ore room V: Finance, Mathematics and Philosophy Conference, 12-13 June 2014 (and award)
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AttendanceThe attendance is free: no fees are required. The registration is requested. The attendance at the workshop is obligatory for the members of the four teams and the maximum number of team-participants is 36 (9 per team).
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Meetings, debates (disputationes) and finale to the workshopThe workshop consists of six public meetings: a preliminary meeting, four presentations and debates, and a finale to the workshop. The preliminary meeting will be held on January, room II, and it will proceed following this agenda:
The four presentations and debates aim at examining and challenging each of the four hypotheses. Each meeting lasts two hours, during which each team will have 30 minutes to explain their hypothesis and defend it against the objections of the other teams according to precise rules of disputatio. Each group’s presentation must discuss at least one case study chosen to show the effectiveness of the defended hypothesis compared to the others. Each meeting is structured in the following way:
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Teams
The workshop comprises debate between four teams made up of students of physics, mathematics and philosophy. These teams have to defend distinct and even conflicting theoretical positions. Organizing the debate in teams has two objectives:
Each team is led by a tutor who helps the students to prepare the presentation and the debate.
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The debate will take place according to rules that are inspired by those of medieval disputationes. During the debate the team must choose between the two main forms of disputatio, without declaring their choice. The debate involves:
(D) must state his thesis and argue in its favor. (A) attempts to refute D’s thesis and has at his disposal two forms to achieve the refutation, the scholastic method (argument) method and the ancient Greek method (question). (M) is responsible for ensuring that the correct procedure is followed and that syllogistic errors in formal logic are not committed and sophistries are excluded. He or she should ensure that equivocation is not used and that everyone agrees on the definitions. In addition, the moderator assigns a score to each disputatio. The score can be assigned at the end of the discussion, or later, after further scrutiny of the arguments and counter-arguments made during the debate.
The two forms of disputatio are:
Thisis the basic pattern of a disputatio, which goes on until a set of propositions is accepted by both the contenders. Furthermore (A) has no obligation to prove anything that is in itself manifest and the rule says that in this case (A) shall specify to (D) that these principles are not to be doubted (but he assumes the responsibility for this statement).
This is based on the obligatio, whereby D attempts to avoid falling into contradiction once (D) has accepted or denied a proposition that is proposed by (A). The disputatio begins with (A), who asks (D) to accept or reject a proposition, in this way "I propose that you assert Y" (pono tibi Y, or positio) or " I suggest that you deny Y" (depono tibi Y, or depositio) . D has three possible moves: "I agree" (concedo, admitto), "I deny" (nego), and "I doubt" (dubito).
More details are provided in the preliminary meeting and will be summarized in a file that will be made available to all participants to the workshop.
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a) Common to each teamMandatory:- Keen, S. (2011). Debunking economics. Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? Chap. 3, 5, 11, 15, 16. - Gillies, D. (2005). Can mathematics be used successfully in economics? in: A guide to what's wrong with economics. London: Anthem Press, p. 187-197. Suggested:- Mandelbrot, B. (2006). The Misbehavior of Markets: A Fractal View of Financial Turbulence. Basic Books.
b) For each teamb1. Team ‘Efficient Markets Hypothesis’ Mandatory:
Suggested:
b2. Team ‘Reflexive Markets Hypothesis’Mandatory:
Suggested:
b3. Team ‘Financial instability’Mandatory:
Suggested:
b4. Team ‘Econophysics’Mandatory:
Suggested:
c) Other suggested resourcesThe Economic Complexity Hypothesis (ECH)
In a nutshell, the ECH put forward by L. Pietroneo, A. Tacchella and M. Cristelli, aims at a more (or mostly) data-driven economics, in order to provide a more concrete scientific grounding for it. It questions the divorce between economy and finance operated by mainstream economics and points to laminar-like regime of complex systems (as opposed to chaotic-like regime) in order to make reliable predictions. The ECH is based on a analogy with weather dynamics, where the best strategy is the prediction of the future from the knowledge of the past (Method of Analogs). The ECH maintains that that, even if all information were discounted by prices, the key point is that some information from real Economy drives Finance
The Social Bubble Hypothesis (SBH)
In a nutshell, the SBH put forward by Sornette and Gisler maintains (see e.g. Sornette 2013, p. 28-9) that strong social interactions between enthusiastic supporters generate reinforcing feedbacks causing a widespread endorsement and extraordinary commitment by those involved beyond a standard cost-benefit analysis. In particular it suggests that “major projects often proceed via a social bubble mechanism” and that bubbles and crashes are “the hallmark of humans”--their “most constructive collective process”. This process also undermines the human quest for stability and hence requires to be prepared and adapted to the systemic instabilities that are part of a collective organization.
The Adaptive Markets Hypothesis (AMH)
In a nutshell, the AMH put forward by Andrew Lo is based on a parallel between evolutionary biology and the financial markets’ behavior. The AMH maintains that intelligent but fallible investors learn from and adapt to changing environments, leading to a relationship between risk and expected return that is not constant in time. Accordingly, markets are not always efficient but they are highly competitive and adaptive, and can vary in their degree of efficiency as the economic environment and investor population change over time.
Books:
Novels:
Movies and documentaries:
Web:
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The workshop will award a prize to the student the offers the ‘best’ contribution (that is providing relevant arguments, effective objections and counter-objections, clear presentations, posts on the blog, etc.). The winner will be chosen by all the participants: organizers, tutors and team-students will give three ordered preferences (the first preference gives 3 points, the second 2 points, the third 1 point) to their choice for the student that best contributed to the workshop. Therefore we invite you to consider carefully the speeches, the presentations and the arguments of your colleagues (also and especially of those belonging to different teams), in order to inform your vote. The voting and the award ceremony will take place during the finale.
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Organizier
Coordinators
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Tutors
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