Why finance theory fails to survive contact with the real world: A fund manager perspective

This paper examines why financial decision theory finds so little application in the real world. A review of the literature identifies shortcomings in research methodologies, and summarises evidence that core finance paradigms prove of limited empirical value. The practitioner perspective is reported based on interviews with 34 fund managers on four continents. These conclude that finance theory is of limited relevance to practitioners because its quantitative approach requires data about the future that are unavailable, and because it ignores practitioner objectives and skill, and the wealth of qualitative data available to them. The paper concludes that future research should better translate practitioner knowledge and practices into improved investment theory.

► Article identifies deficiencies in finance theory. ► Interviews 34 fund managers on four continents to examine their use of theory. ► Theory impractical to use due weak foundations, non-availability of data and omission of intuitively important material. ► Weaknesses arise because decision paradigms not validated with practice. ► Better descriptive theory required to translate research-practitioner knowledge.