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Mathematical Representation in Economics and Finance: Philosophical Preference, Mathematical Simplicity, and Empirical Relevance

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Methods and Finance

Part of the book series: Studies in Applied Philosophy, Epistemology and Rational Ethics ((SAPERE,volume 34))

Abstract

As Keynes pointed out, classical economics was similar to Euclidean geometry, but the reality is non-Euclidean. Now we have abundant evidence that market movements are nonlinear, non-equilibrium, and economic behavior is collective in nature. But mainstream economics and econometrics are still dominated by linear, equilibrium models of representative agent. A critical issue in economics is the selection criteria among competing math models. Economists may choose the preferred math representation by philosophical preference; or by mathematical beauty or computational simplicity. From historical lessons in physics, we choose the proper math by its empirical relevance, even at the costs of increasing mathematical dimensionality and computational complexity. Math representations can be judged by empirical features and historical implications. Recent historical events of financial crisis reveal the comparative advantage of the advanced math representation. Technology progress facilitates future advancements in mathematical representation and philosophical change in economic thinking.

For the Workshop on Finance, Mathematics, and Philosophy, Rome, June 12–13, 2014.

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Acknowledgements

The author thanks Emiliano Ippoliti and participants of the Workshop on Math, Finance, and Philosophy at Rome on June 12–13, 2014. The author also thanks stimulating discussions with Yuji Aruka, Edward Fullbrook, James Galbraith, David Hendry, Justin Lin, Richard Nelson, Edmund Philps, Andreas Pyka, Hong Sheng, Zhengfu Shi, Joseph Stiglitz, Yinan Tang, Wolfgang Weidlich, and Elsner Wolfram.

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Authors and Affiliations

  1. China Institute, Fudan University, Shanghai, China

    Ping Chen

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  1. Ping Chen
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Correspondence to Ping Chen .

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  1. Philosophy Department, Sapienza University of Rome,Dipartimento di Filosofia Via Carlo Fea 2, Rome, Italy

    Emiliano Ippoliti

  2. National School of Development, Peking University, Beijing, China

    Ping Chen

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Chen, P. (2017). Mathematical Representation in Economics and Finance: Philosophical Preference, Mathematical Simplicity, and Empirical Relevance. In: Ippoliti, E., Chen, P. (eds) Methods and Finance. Studies in Applied Philosophy, Epistemology and Rational Ethics, vol 34. Springer, Cham. https://doi.org/10.1007/978-3-319-49872-0_2

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