Evaluating Financial Research Claims

For the last half-century, financial researchers have fallen short of scientific rigor, focusing on associations not supported by theory and not amenable to falsification. Is there is hope for finance to become a scientific field? In his April 2023 paper entitled “The Hierarchy of Empirical Evidence in Finance”, Marcos Lopez de Prado proposes a hierarchy of empirical evidence that gives greatest scientific weight to methods allowing falsification of causal claims. He addresses:

• Why associations alone do not constitute scientific knowledge.
• The importance of causality and how statistical methods enable the falsification of causal claims.
• How to extract causal effects from observational studies in fields like finance with inherent barriers to controlled experimentation.
• An example of examining causality in finance.

He ultimately translates the distinction between associational and causal claims into a hierarchy of empirical evidence in finance. Based on the philosophy of science and the constraints of studying complex financial systems, he concludes that: (more…)