Further Discussion: Why Financial Theory Stagnates Over Decades?

It is difficult to see the theories or models set up after the 1980s in finance related textbooks, most or all important theories and models were established before 1980. For example, portfolio theory (1952), MM models (1958, 1963), capital asset pricing model (1964), and Black–Scholes model (1973). It turns out that the financial theory or models found in early years can really solve problems, while the theories created in recent decades, such as information asymmetry theory, behavioral finance theory, pecking order theory, etc., does not solve any problem. For example, “information asymmetry” is just a phenomenon or common sense; some theories set up in recent years is even at a level below common sense. Common sense is not a theory, do not mention the theories below the level of common sense. Theory should be higher than common sense in order to guide practice; otherwise, there is no significance for the scientific research. But why financial research in recent decades can only create theories or conclusions at or below common sense? This Further Discussion makes a deep discussion on it. After the World War II, with the recovery and development of the economies of main countries, the research of financial theory had also boomed over about 30 years and obtained a lot of theoretical discoveries. These theoretical discoveries not only solve relevant financial problems and promote the understanding of relevant issues, but also promote financial research from experience-based level to the height of science and theory, becoming milestones one after another in the development of financial theory. For various reasons, in recent decades since 1980s, the financial research and findings went back to experience-based or even common sense level, such as information asymmetry theory, behavioral finance theory, pecking order theory, etc. Perhaps most people have not realized that those new and popular “theories” are just well known common senses being renamed; and the new stylized financial research does not intend originally to solve decision problems in finance, but just to describe various and endless phenomena in finance and to make some explanations based on subjective guesses. Related to the common sense level in research, after decades of research in full swing, the remained financial problems have basically not been further solved, and there is even no progress in the relevant understanding. However, the problem is, why is financial research has been stayed at the common sense level or even lower than common sense level? The reasons behind this phenomenon deserve our deep thinking and reflection.