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2023 | OriginalPaper | Buchkapitel

Further Discussion: Is Practice Ahead of Theory? —Based on the Case of Finance

verfasst von : Zhiqiang Zhang

Erschienen in: Fundamental Problems and Solutions in Finance

Verlag: Springer Nature Singapore

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Abstract

This appendix explores a common saying that “practice has gone in front of theory”, and obtains some valuable insights. In history, practice might be ahead of theory for hundreds of years, such as the practice and theory of commercial banking. The practice of being ahead in several years is often concerned, but that of being ahead very long is often ignored. Based on reasonable division of labor, practice should be responsible for exploring new fields and providing problems to be studied for theory; theory should solve problems for practice and promote practical progress. Therefore, practice should be “ahead of theory”. Theory and practice should cooperate with each other to jointly promote the progress of human society. Based on these findings, further discussions reveal more insights, such as problem solving relies on theory rather than practice, because practice stresses more on timeliness rather than rightness. Other discussions, like how to make sure the usefulness of theories, how to evaluate theories, etc., also reveal relevant insights. The relationship between theory and practice is often puzzling. Sometimes people think that theory guides practice. Then, theory should precede practice. Sometimes people think that theory comes from practice. Then, practice should precede theory. In history, there are both cases where theory or practice is in front. It is necessary to discuss from the perspective of rational relations whether theory or practice should be in front.

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Fußnoten
1
As early as 1580 in Venice, Italy, there was the “Bank of Venice”. The English word “bank” is transformed from the Italian “Banca”. After the establishment of the Bank of Venice, banks were also established in other cities in Italy, Amsterdam in the Netherlands in 1609 and Nuremberg in Germany in 1621.
 
2
According to Aristotle's politics, in about 550 BC, Thales, an ancient Greek philosopher, used his money in pocket as a deposit, locked the lease of the olive oil press in the coming year and got success to make a large sum of money.
 
3
In the nineteenth century, the research on option pricing mainly focused on at the money option. By 1900, Louis Bachelier, a student of the French mathematician Henri Poincaré, published his doctoral thesis, the theory of speculation, which studied the option pricing problem by using stochastic processes. His model already contains important ideas and elements to solve the option pricing problem. Later, in the 1960s, Sprenkle formula (1961), Boness formula (1964) and Samuelson formula (1965) appeared respectively, which further approximated the Black Scholes model. In 1973, Black and Scholes published the option value model, which can be considered as basically solving the option pricing problem.
 
4
In 1938, John Burr Williams proposed in his investment value theory that the investment value of common stock is the discounted value of its future dividends. It is generally believed that this is the earliest elaboration and application of the discount method.
 
5
Among them, the theory of natural science plays a leading role and the theory of social science plays an auxiliary role. In any case, social science is also science, and its progress is also the ladder of human social progress.
 
6
This is the basic feature that distinguishes science from art. Strictly speaking, finance and financial theory belong to science, and their solutions may be right or wrong.
 
7
The conclusion of MM model I is that the debt ratio has no effect on the company value, so it doesn't matter how much capital financed by debt. MM model II considers the benefit of debt, that is, the tax shield, but fails to consider the cost, that is, the bankruptcy cost, so it comes to the conclusion that the more debt, the better.
 
Metadaten
Titel
Further Discussion: Is Practice Ahead of Theory? —Based on the Case of Finance
verfasst von
Zhiqiang Zhang
Copyright-Jahr
2023
Verlag
Springer Nature Singapore
DOI
https://doi.org/10.1007/978-981-19-8269-9_4

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