Topic:The Mathematical language of

academic finance: a paradigmatic look

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Presented to:Mr. Hassan Mujtaba N.Saleem

Presented by:

Shahid Amin 38

M.Adeel 23

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IntroductionNature and role of mathematical language in financeFour paradigms

Functionalist

Interpretive

Radical Structuralist

Radical Humanist

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Four Basic Paradigms

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Functionalist ParadigmIt occupies the south-east quadrantLocated on the objective-subjective continuumFrom right to left:

ObjectivismSocial system theoryInteractionismSocial action theory

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Objectivism:Is the philosophy, it holds that reality exists independent

of consciousness; that individual persons are in direct contact with reality through sensory perception.

Social system theory:a philosophical viewpoint on the relationship of person

with their social environment.It offers greater potential for description and integration

of disparate theories into a single framework that any other framework.

It provides suggestive leads For all sectors of human behavior

It has the potential to provide a common language.

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• Interactionism TheoryA theoretical framework that imagine society as the

product of the everyday interactions of people doing things together.

To understand such interactions, emphasis is placed on studying everyday social life through life stories, observations, etc.

• Social action theorySees society as product of human activity, rather than

behavior as largely determined by societyStresses meaningfulness of human behavior

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Functionalist ParadigmAssumptions:

Society has a concrete existence and follows a certain order

Scientific theories can be assessed objectively by reference to empirical evidence

Universal standards of science which determine what constitutes an adequate explanation of what is observed

External rules and regulations governing the external world

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Functionalist Paradigm

Seeks to provide logical explanations of social affairs

Emphasizes the importance of understanding order, equilibrium and stability and the way these can be maintained

Natural sciences are used to generate explanations of the social world

Functionalists are individualists

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Theories and PoliciesEfficient Market Hypothesis:

An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

According to the EMH, stocks always trade at their fair value, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. 

Portfolio Theory:Is a theory of investment which tries to maximize return and

minimize risk by carefully choosing different assetsInvests with the aim of selecting a collection of investment

assets that has collectively lower risk than any individual asset10

Theories and Policies(Cont’d..)Capital Asset Pricing Model:

Used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-expanded collection, given that asset's non-increasing risk

It includes: Risk Free rate, Beta, Market Rate

Option Pricing Theory:Any model- or theory-based approach for calculating the fair

value of an option or alternativeFactors that determine the value of an option include current

stock price, the intrinsic value, time to expiration or the time value, volatility, interest rates and cash dividends paid

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Theories and Policies(Cont’d..)Agency Theory:

A theory concerning the relationship between a principal (shareholder) and an agent of the principal (company's managers)

In this relationship the principal delegates or hires an agent to perform work

Arbitrage Pricing Theory:An asset pricing model based on the idea that an asset's

returns can be predicted using the relationship between that same asset and many common risk factors. 

this theory predicts a relationship between the returns of a portfolio and the returns of a single asset through a linear combination of many independent macro-economic variables.

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Theories and Policies(Cont’d..)Capital budgeting policy:

It is a policy in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark.   

Also known as "investment appraisal".

Capital structure policy: it is a policy in which a company mix its long-term debt,

specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds.

It is also represent the Debt-Equity ratio. 13

Theories and Policies(Cont’d..)Dividend policy:

The policy a company uses to decide how much it will pay out to shareholders in dividends.

Dividend may be: Cash dividend Stock dividend

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Common threads among these theories

There is cause and effect mechanism underlying all nature and human activity (ontology)

Nomological connections between initial condition and final outcomes (epistemology)

Human beings interact with each other and their society in accordance with this mechanism (human nature)

Information regarding all nature and human activity can be acquired through observations and measurements unaffected by individual perceptual differences (methodology)

Functionalists’ views with respect to the nature of language and its role:

• Experience can be adequately captured in language• Proper names• Atomic sentences• Compound sentences• Meta-languages

Two linguistic levels:

Simple in form

Richer in modes of expression

Interpretive Paradigm

Occupies the Southwest quadrant.Located on the objective-subjective continuumFrom left to right they are:

SolipsismPhenomenologyPhenomenological sociologyHermeneutic

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Solipsism: is the philosophical idea that only one's own mind is sure to

exist. The external world and other minds cannot be known and might not exist.

Solipsism is a view that can only be stated in the first person.

Phenomenology:Use of subjective data to describe an objective truthA framework for providing a qualitative understanding of

human experienceFocuses on the meaning of human experiences

(phenomenon)Researcher’s own experiences integrated into the studyFocus on finding the common thread in phenomenon It is useful when researcher wants to understand human

experience 19

Phenomenological sociology:is the study of the formal structures of concrete social

existence as made available in and through the analytical description of acts of intentional consciousness.

Hermeneutic:is the study of interpretation theory, and can be either

the art of interpretation, or the theory and practice of interpretation.

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It sees the social world as a process which is created by individuals

There are shared multiple realities which are sustained and changed

It enables scientists to examine aggregate market behavior together with ethical, cultural, political and social issues

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Interpretive ParadigmIt believes that:

In cultural sciences the subject matter is spiritual in nature and human beings are perceived as free

Scientific knowledge is socially constructed and socially sustained, its significance and meaning can only be understood within its immediate social context

There are no universally valid rules for finance and financial management

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Interpretive paradigm views with respect to the nature of language:

Language gameBasic picture(simple language to complex

language) Language not fixed once and for allUse determine meaning; meaning does not

determine use

“The way of telling anything” relates to “what the thing is”

Not common to allResemblance, not identity

The Radical Humanist Paradigm

“The Radical Humanist Paradigm views language as both inhibiting the growth of human beings and as the solution to the removal of such an inhibition”

How???

Theories InvolvedSolipsism TheoryExistentialism TheoryAnarchistic IndividualismCritical Theory

Solipsism Theory

Solipsism is the philosophical idea that only one's own mind is sure to exist

Solipsism is philosophy that any knowledge outside one’s own mind is useless

Existentialism TheoryThe individual is solely responsible for giving

their own life meaning and living that life single-mindedly and sincerely despite many existential obstacles and distractions including hopelessness, anxiety, opposition, and boredom

The focus of philosophical thought should be to deal with the conditions of existence of the individual person and their emotions, actions, responsibilities, and thoughts

Anarchistic Individualism TheoryAnarchism is a political philosophy which

considers the situation undesirable, unnecessary and harmful, and as a substitute promotes a stateless society, or disorder

It seeks to diminish or even abolish authority in the conduct of human relations

Critical TheoryCritical theory is the examination and

critique of society and culture, drawing from knowledge across the social sciences and humanities

The Radical Humanist ParadigmIt assumes that reality is socially created and

sustained It tends to view society as anti-humanIt believes that everything must be grasped as a

whole, because the whole dominates the parts in all embracing sense

The consciousness of human beings is dominated by ideological superstructures of social system

The social theorist seek to change the social world through a change in consciousness

The Radical Humanist Paradigm

Radical Humanists’ Views about:

The Nature and Role of Language

Radical Humanist view links types of knowledge with Cognitive interests:

Cognitive Interests reflectHuman ExistenceHuman Experience

Human Existence Existence exhibits three main dimensions: Man’s relation with:1. Nature………………..Technical Interest2. His fellow Man………Practical Interest3. And with himself…….Emancipatory

Interest Language as speech plays role primarily in

the last two fields……………. How??

First as an instrument of Communicative interaction

Second as a medium of self knowledge and rationality

Communicative Competence

Vs

Communicative Distortion

Communicative Competence “It is an ideal speech situation”The speaker must have:Own Clearance about speechLinguistic Competence (Language Skills) Symbolic Interaction (Non Verbal)

A successful & valid speech must count as:

a) True…..as it represents something in the world

b) Truthful…as it expresses something by the speaker

c) Right….as it conforms socially recognized expectations

Functional Level Chief types of Language are:Cognitive

“Propositional Content OR obtaining knowledge through thought, Experience & Senses

Interactive “Interpersonal or Speaker-Hearer Relations”Expressive“Self Disclosure”

Communicative Distortion“it is the communication misrepresentation”

“ The speech in which the agreement, compromise or consent come through dialogue within the context of an unequal power distribution”

The Radical Structuralist Paradigm

“The Radical Structuralist Paradigm views language as being created by economic substructures”

How???

Theories InvolvedSocial Theory

Conflict Theory

Social Theory“Social theories are theoretical frameworks which are

used to study and interpret social phenomena”

Conflict Theory“Conflict theories are perspectives in social science which emphasize the social, political or material inequality of a social groupConflict theories draw attention to power differentials, such as class conflict, and generally contrast historically dominant ideologies

The Radical Structuralist Paradigm It assumes that reality is objective and

concrete. It views society as a potentially dominating force Uses scientific method to find the order that

exists in the phenomenon

This paradigm is based on four central notions:

1. Totality2. Structure3. Contradiction4. Crisis

1. Totality:It emphasizes that the whole society determines its parts

2. Structure:The focus is upon the configurations of social relationships called structures

3. Contradiction:Social formations also contain contradictory relationships which cause of decline in their standard

4. Crisis:Contradictions sometimes also cause of political and economic crisis

The Radical Structuralist ParadigmTo survive and reproduce themselves, human

beings transform reality

The Radical Structuralist Paradigmviews about:

The Nature and Role of Language

The Nature and Role of LanguageWord as Ideological sign is suitable for viewing

the whole of its relationship in basic termsIdeological sign has two faces Any current curse can become a word of praiseAny current truth must inevitably sound to

many others as the greatest lie Word has capacity to register all the short term

& delicate phases of social changeEach period and each social group has its own

speech for ideological communication

Conclusion Functionalist Paradigm views language as an

instrument for reference to sense data or systematic treatment of ideas

Interpretive Paradigm views language as being socially constructed

The Radical Humanist Paradigm views language as both inhibiting the growth of human beings and as the solution to the removal of such an inhibition

Radical Structuralists Paradigm views language as created by economic substructure

Conclusion cont’d…The knowledge of paradigms makes scientists aware of

the boundaries within which they approach their subject

The paper recommends a serious conscious thinking about the social philosophy upon which finance is based

The knowledge of finance is a product of the researcher’s paradigmatic approach to this multi-faceted phenomenon

The financial knowledge is seen as being as much an ethical, moral, ideological and political activity as it is a technical one

An understanding of different paradigms leads to a better understanding of the multi-faceted nature of finance