How Financial Economics Relates to Finance

Summary

The note discusses whether finance should be treated as a subfield of economics or as a distinct discipline. It describes overlap in their history and methods: economists contributed much early work in finance, and financial research draws on econometrics, time-series analysis, and macroeconomics. Risk-neutral pricing, however, can look less like traditional economic analysis.

The discussion uses the debate over Markowitz’s portfolio theory as an example of differing disciplinary boundaries, recounting Milton Friedman’s reported objection to classifying the work as economics. It also mentions mechanism design as a field whose origins in operations research did not prevent its later association with economics. These examples illustrate contested academic labels rather than establish a definitive boundary; the answer offers a personal view and no technical method for trading or quantitative research.

Key ideas

• Finance and financial economics overlap substantially, but scholars disagree about whether finance belongs within economics.
• Finance draws on econometrics, time-series methods, and macroeconomics.
• Risk-neutral pricing may appear distinct from more traditional economic approaches.
• Academic disciplines can claim related fields whose work originated elsewhere.

Tags

# Financial economics vs finance


# Financial economics vs finance












What is the difference between financial economics and finance?

## Answer by Matthew Gunn (score 8)

https://quant.stackexchange.com/a/36247

Financial economics is what economics calls finance. Finance is what finance calls finance.

Less flippantly though, there's a long debate on whether finance is a subfield of economics, and this debate goes back at least to the PhD thesis of Markowitz. Prof. Milton Friedman famously opposed awarding Markowitz a PhD in economics from the University of Chicago for his portfolio theory because while Markowitz's work was brilliant, Friedman didn't consider it to be economics. I've heard Myron Scholes also express views that finance is to some extent distinct from economics.

Of course, you can find a huge range of views on whether finance is an economics subfield. Clearly much of the early work in finance was done by economists, and finance draws heavily from econometrics, time-series econometrics, and macroeconomics. On the other hand, risk-neutral pricing looks less like classic economics.

I'd personally argue there's some degree of economics claiming successful, related fields as its progeny. The mechanism design of Alvin Roth came out of operation research, but it's now been brought into economics.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.