Epistemic Limits of Empirical Finance: Causal Reductionism and

Self-Reference
Daniel Polakow1,2,* , Tim Gebbie3 , and Emlyn Flint2,4
1
Department of Statistics and Actuarial Science, University of Stellenbosch
2
School of Actuarial Science, University of Cape Town
3
Department of Statistical Sciences, University of Cape Town
4
Peresec, Cape Town
*
Corresponding author: dpolakow@sun.ac.za
arXiv:2311.16570v2 [q-fin.GN] 5 Dec 2023

December 6, 2023

‘Everything that is born is necessarily born through the action of a cause’

Timaeus, Plato c. 360 BCE

‘I can calculate the motion of heavenly bodies, but not the madness of people’
Sir Isaac Newton, 1720 CE

Abstract
The clarion call for causal reduction in the study of capital markets is intensifying. However, in self-
referencing and open systems such as capital markets, the idea of unidirectional causation (if applicable) may
be limiting at best, and unstable or fallacious at worst. In this work, we critically assess the use of scientific
deduction and causal inference within the study of empirical finance and econometrics. We then demonstrate
the idea of competing causal chains using a toy model adapted from ecological predator/prey relationships.
From this, we develop the alternative view that the study of empirical finance, and the risks contained therein,
may be better appreciated once we admit that our current arsenal of quantitative finance tools may be limited
to ex post causal inference under popular assumptions. Where these assumptions are challenged, for example
in a recognizable reflexive context, the prescription of unidirectional causation proves deeply problematic.

Keywords— Causal Investing; Reflexivity; Empirical Finance; Epistemology; Risk Management; Spuriosity

1 Introduction
There is an obvious resurgence of interest in causal
inference. For good reason; causality is arguably the
holy grail of any scientific enquiry (Little, 1998) and
has been deliberated since the time of Hume (1739).
Existing coverage on causality in the philosophy liter-
ature is comprehensive and, for brevity, we will not be
reviewing this in detail here.
Rigor and a prescription of causal relevance has
also pervaded finance and economics disciplines; in-
cluding econometrics (Angrist and Pischke, 2010; Chen
and Pearl, 2013; Ahmed, 2022) and investment man-
agement (Wilcox and Gebbie, 2014; López de Prado,
2023a). Concurrently, Quantitative Finance (QF),
which generically includes the investment and econo-
metrics disciplines, is embarking on a purge of ‘incor-
rect’ statistical methodologies. Such flawed statisti-
cal approaches have resulted in a proliferation of false 1 Sensu the positive economics of Friedman (1953) and the
Harvey and Liu, 2014; Bailey et al., 2014, 2017; López
de Prado, 2015, 2023a,b).
The uptake of defensible statistical methods is a pro-
gressive movement within QF that, along with more
cautious distillation of causal pathways, supports sci-
entific realism as well as positive economics. However,
while explaining economic phenomena is the intended
result1 , the movement also has the potential to in-
correctly totalize disparate phenomena. In particular,
compared with prescriptive normative economics, such
an approach can become uncoupled from market on-
tology, leading to a disconnect between the reality of
capital markets and the assumptions – and thus output
knowledge – of its reductionist studies.
This contribution has foci on financial risk, specifi-
cally model risk in relation to a single common assump-
tion pervasive in QF studies; namely, that markets,
being social systems, adhere sufficiently to epistemic

claims and charlatanism (Ziliak and McCloskey, 2008; apparent rise of economics as a ‘cyborg science’ (Mirowski, 2001).

1
norms. These epistemic norms carry with them a pri-
ori the necessity of unique, well-defined causal chains
that can be meaningfully extracted from data in a pos-
itive economics framing and a reductionist scientific
sense.
2 Causal chains
To understand epistemic norms in markets, first we
note that there are some important assumptions un-
derpinning economic thinking. Of course, there exist
several different economic schools of thought. The di-
chotomy between neoclassical, or orthodox, and hetero-
dox economics (arguably, everything else) is frequently
made to smooth over and sometimes smother the prag-
matic importance of these assumptions as a binary
framing that casts idealisms and normative approaches
in opposition to positivist perspectives.
While orthodox approaches idealize an economic sys-
tem in which the rationality of participants is key,
heterodox economics emphasizes inefficiencies and im-
balances generated by the system. Nonetheless, both
modern orthodox and heterodox economic approaches
aim to incorporate a range of imperfections within their
standard frameworks to render them more realistic. In
this setting, realism is defined as the ability to provide
narrative explanations that are cohesive within a given
ontology, or to make successful predictions.
At the heart of the positivist agenda, which resides
within the broader scientific realist school of thought,
is the goal of causal explanation; and unidirectional
causation is the de facto supposition. In this regard,
of contemporary relevance is the work spearheaded
by Pearl and co-workers (Pearl (1995, 2009a,b); Pearl
et al. (2016)) who have formalized empirical causal
modeling and hence laid the foundations of much of
modern artificial intelligence.
Unidirectional causality refers to A causing B, for
example the price action in B being caused by market
interest A, ceteris paribus. In terms of the mathemat-
ics of causality (Pearl, 1995), we express B as some
function of A:
P [A = a] do[B = b] > P [A = a].
A diagrammatic representation of Eqn. [1] is provided
in Figure 1a.
Eqn. [1] and its associated framework accommo-
dates both neoclassical equilibria and heterodox dy-
namics, depending on the size and term of the arbi-
trageable phenomenon under consideration.2 Mathe-
matician Robert Buck defined ‘self-frustrating’ predic-
tions as forecasts that are initially true, but become
false on public dissemination (Buck, 1963). Moreover,
Popper (1957) in his writings on social sciences refers
to ‘self-limiting’ predictions influencing the predicted
event in a preventative sense. Markets are similarly
understood to adapt as the outputs of scrutiny are as-
similated. This understanding is accommodated within
the idealized neoclassic theory of economics.
2 The “do” operator is forcing B = b by intervention.
Returning to Eqn. [1], unidirectional causality does
not permit B to cause A and it does not facilitate A
being limited by its subsequent impact on B via self-
limiting feedback. While causal graphs are typically
linear and unidirectional, self-limiting processes with
dampening feedback are commonly tolerated without
being fatal to ex post inference. Importantly, contem-
porary QF is already suitably cognizant of this ‘adap-
tation’ of the market to new information (López de
Prado, 2015; McLean and Pontiff, 2016; Falke et al.,
2022).
More generally, adaptation is a feature common to
‘reflexive’ systems; namely, systems that refer to them-
selves. While proponents of causal rigor recognize
that markets are adaptive, the fact that they are,
more broadly, self-referential is commonly overlooked.
Specifically, markets may be possessed by dynamics
that extend further than simply adaptation.
A self-referential system is reflexive in nature. This
is a surprisingly pervasive idea: the ‘Oedipus effect’ of
Popper (1957), the ‘self-fulfilling prediction’ of Buck
(1963), or the ‘back-coupling’ of Morgenstern (1972).
MacKenzie (of performativity literature renown) noted
that the study of economics does more than simply de-
scribe, but rather shapes and changes the conditions
of the economy, and society more broadly (MacKen-
zie, 2006; MacKenzie et al., 2007). It thus possesses
the ability to analyze, describe, and modify its own
structure, behavior, and properties. To say this phe-
nomenology of self-reference is well-known, recurring
and deeply studied is an understatement.3
Lehmann-Waffenschmidt and Sandri (2007) char-
acterize two dynamics of reflexive systems: self-
reinforcing and destabilizing (via positive feedback
loop).4 Markets are thus not limited to preventative
feedback loops; instead, such loops may also be desta-
bilizing. For example, predictions such as fundamental
market value can persist or change solely due to par-
ticipants’ beliefs. Furthermore, runs on banks, asset
bubbles, the volatility implied in option prices, booms-
and-busts and the allure of factor exposures are all
characteristic of a system possessed by self-referential
properties.5 Within such systems, sufficient conviction
(1) in an association can, in fact, result in (i.e. cause)
that same association (Polakow, 2010). The notion of
‘spuriosity’ thus also becomes ambiguous.
Tony Lawson, the eminent heterodox economist, ex-
3 Self-referential study originates from Spencer-Brown’s Laws
of Form (Spencer-Brown, 1969) and extends to the calculus de-
veloped by Varela (1975). The field finds parallels in philosophy
(radical constructivism; Von Glasersfeld (1984)), control theory
(e.g. second-order cybernetics; Von Foerster (2003)), and eco-
nomics (the Eigenform of markets; Kauffman (2009)). Daniel
Hofstadter discusses self-reference systems extensively in his pop-
ularist book (Hofstadter, 1999).
4 Goodhart’s law (Goodhart, 1984): any observed statistical
regularity will tend to collapse once pressure is placed upon it
for control purposes. Campbell (1979)’s law prior and the ‘Lu-
cas Critique’ (Lucas, 1976) are further examples of reflexive re-
sponses.
5 Such examples may also, however, characterize systems that
are not self-referencing. Discerning a parsimonious likelihood
function is therefore not trivial.
2
plains why markets ultimately cannot adhere to epis-
temic norms. Lawson (2003) defines closed systems to
refer to a situation in which a correlation (an event
regularity) occurs. In the absence of conditions sup-
porting such correlations, the system is then deemed
to be ‘open’. Markets, being a social system, are de-
scribed as an ‘open system’.
“. . . modern mainstream economics is awash with
assumptions of perfect foresight or rational expecta-
tions, of efficient markets, and of market equilibrium,
all, at least in the manner they are typically employed,
essentially premised on the successful predictability of
future outcomes; all supposing that in an open system
actual outcomes can be effectively anticipated. Indeed
all such endeavour in effect treats open systems as if
there are actually closed” – Lawson (2003).
Markets are unequivocally an open system.6 Such
a system often involves recursive or circular relation-
ships, where the system’s components interact or define
themselves in terms of other components within the
same system. Of relevance here, self-referential sys-
tems are possessed of unusual properties, highly com-
plex and challenging to understand or analyze, espe-
cially using traditional reductionist approaches and as-
sumptions of causation (Soros, 2013).
The dynamics of causal chains within self-referential
systems are often paradoxical. Umpleby (2010) notes
that in self-referencing systems we transition from a
classical paradigm of inferring A causes B, to higher-
order dynamics with very different notions of stabil-
ity, independence, structure and temporality. The
very idea of model building and usage becomes nu-
anced. The presence of reflexivity will frequently result
in circular reasoning – deemed fallacious by contem-
porary academic standards.7 The problem of causal
emergence will frequently present itself in the form
where multiple competing versions co-exist and com-
pete (Hoel, 2017).
Markets comprise a system of interacting actors,
with multiple levels of causation (Wilcox and Gebbie,
2014). The debate is not whether markets, being an ob-
vious social system, are self-referential or not. Rather,
we believe the controversy revolves around two points.
Firstly, to what extent does such a self-referential sys-
tem differ ontologically from the closed system we com-
monly assume? Secondly, can such a self-referential
system produce behaviors and inefficiencies that are
persistent and non-arbitrageable?
Neoclassical economic thought, arguably the dom-
inant paradigm, is premised on the basis that imbal-
ances are only temporary and so the existence of short-
term market imperfections are tolerated in the system.8
Heterodox thinking is more permissible to tolerat-
6 Here, a closed system means a closed system of regular
events, and implies predictability. An open system is then one graphs exist only as component processes enmeshed in
in which prediction is itself not regularly achievable.
7 Reflexivity further violates the ad hominem informal fallacy
and the fallacy of accent: markets operate at both ‘observing’
and ‘participating’ levels (Umpleby, 2010).
8 In this vein was Soros’ view of reflexivity rebuffed by the
economic establishment as ‘merely stating the obvious’ (Soros,
2009).
ing longer-term disequilibrium. For example, Farmer
and colleagues demonstrate how simple ecological mod-
els result in endogenous inefficiencies and deviations
from notional fundamental values (Galla and Farmer,
2013; Scholl et al., 2021; Sanders et al., 2018). Hirsh-
leifer et al. (2023) examine the extent to which hetero-
geneity of investment styles can co-exist in the long-
term, in contrast to the predictions wrought from tra-
ditional theory, and in response to social contagion.
The study builds on the Adaptive Markets Hypothesis
(Lo, 2004, 2017), under which market participants be-
have (mostly) rationally using a set of natural-selection
heuristics. Such heuristics can become maladaptive
during exogenous shocks.
2
+
-
A 1 B
(a) Conventional causal graph
A 3 B
- +
4
(b) Alternative (dual) causal graph
Figure 1: A conventional unidirectional causal graph of
A causing B (path 1) is shown in Fig. 1a; here with the
addition of a negative (self-limiting feedback loop, de-
noted “-”), and a positive (destabilizing feedback loop,
denoted “+”), both of the latter dependencies along
path 2. Fig. 1a (path 1 only) graphically represents
Eqn. [1]. This can be compared to the alternative
unidirectional causal graph shown in Fig. 1b (path 3
only), which represents Eqn. [2], where B is shown
causing A along path 3, with the addition of negative
(self-limiting feedback loop, denoted “-”); and positive
(destabilizing feedback loop, denoted “+”), the latter
both along path 4. Feedback dynamics between these
causal chains, 1a and 1b, may be indistinguishable un-
less intervention is involved.
Yet, it appears that both schools of thought – neo-
classical and heterodox – retain the view that unidi-
rectional causality remains relevant as a formalism,
even if these linear cause-effect or circular dampening
an ensemble of interactions of a more complex system
(Hardy, 2001; Hommes, 2021).
If causality is in fact more malleable in a reflexive
system (perhaps to the point of being wholly subjec-
tive) there is a competing reality that requires admis-
3
sion as a hypothesis: B causes A (ceteris paribus):9 where the dot represents a time derivative. The fea-
ture x could be taken to represent the number of in-
P [B = b] do[A = a] > P [B = b] (2) dividuals in a population, or the log-price of an asset,
or the wealth associated with the accumulated profit-
A diagrammatic representation of Eqn. [2] is provided
and-loss of some trading strategy conditioned on vari-
in Figure 1b. It is critical to realize that the feedback
ous information sources. This model can be randomly
dynamics embedded in Eqn. [1] will effectively be indis-
perturbed, although we keep the argument determin-
tinguishable from those of Eqn. [2] unless intervention
10 istic.
is invoked.
Once discretized, the model demonstrates the well-
Lehmann-Waffenschmidt and Sandri (2007) note
understood bifurcation phenomena shown by May
that within economics, it is not possible to draw con-
(1976). This is shown by replacing the feature deriva-
clusions on the logical legitimacy of any reflexive mech-
tive with the derivative of a logarithm of the feature
anism. Shaikh (2013) noted that even heterodox eco-
from Eqn. [3] and converting it into a difference equa-
nomics maintains the notion of an equilibrium and that
tion: ln xn+1 − ln xn = r(K − xn ). By taking the
different economic foundations are required for ade-
exponential of the log-difference equation we find the
quately dealing with reflexivity. The scientific fallibil-
Logistics Difference Equation (LDE)13 :
ity of economics was identified and discussed compre-
hensively in the early 1980s (McCloskey, 1983). Soros xn+1 = xn er(K−xn ) . (4)
(2013) argued plainly that markets did not benefit from
the same epistemic norms of science. In particular, if We now progress the metaphor, but for coupled fea-
financial models operate within a self-referential frame- tures that include an interaction term. For simplicity
work they can be non-causal, resulting in an inability we restrict ourselves to two features x(t) and y(t), with
to predict (De Scheemaekere, 2009). constant causal couplings14 :
In summary, the presence of reflexivity poses a
clear challenge to the epistemology of QF since it is ẋ(t) = rx(t) (K − x(t) − ayx y(t)) ,
not accommodated within a unidirectional causality ẏ(t) = ry(t) ((K − y(t) − axy x(t)) . (5)
paradigm. The reason why reflexivity does so is sim-
ply stated: chains of causality are ostensibly malleable There are two coupling parameters ayx and axy . If
by the actors within markets. For guidance (and illus- the two features were correlated then this parameter
tration) we turn to a well-understood set of complex would be symmetric. The argument can be generalized
systems: ecology.11 to many such features. To generate causal chains, we
discretize the coupled differential equations (Hastings,
1993; Sugihara et al., 2012) and find the causal chain
3 Causal predation update equations:
Extending ecology metaphors within finance has prece- xn+1 = xn erx (Kx −xn −ay→x yn ) ,
dent (Scholl et al., 2021). Contemporary empirical
yn+1 = yn ery (Ky −yn −ax→y xn ) . (6)
views provide examples of predator-prey models ex-
plaining, for example, S&P500 dispersion in terms of This model has two different growth rates, two differ-
contrarian and trend-following agents competing with ent carrying capacities, and two dependency variables.
and predating upon each other (Lux, 2021). As a useful With ay→x ̸= 0, but ax→y = 0 this would be unidi-
metaphor, we explore the co-existing dynamics of two rectional, from y to x. These are now situated as part
competing causal chains within a similar self-referential of a sequence of unidirectional causal relationships in
system, adapted from ecology (May, 1976; Sugihara a chain, where each iterate xn , can be thought of as a
et al., 2012). This forms an illustrative toy model of realization of one node, and similarly, yn for the other,
simple reflexive causal chains that can generate com- as a realization of the graph in Fig. 1.
plicated dynamics.12 We can simulate the chain of unidirectional causal
Consider a single self-dependent and time-dependent graphs and visualize key features of the resulting dy-
feature x(t) that can be well modeled by a logistics namics by considering iterations of the coupled LDE.
function, here with rate of change parameter r, and The resulting coupled bifurcation map is shown in Fig.
carrying capacity K 2. This renders our key points concrete.
We see that even if we explicitly know, with cer-
ẋ(t) = rx(t)(K − x(t)). (3)
tainty, the deterministic and non-stochastic causal re-
9 e.g. the price action in B causes the market interest A.
lationship between chains xn and yn (or even if we
10 B impacting A via path 2 may be indistinguishable from B
know the causal relationships between the underlying
causing A via path 3, unless by control (intervention), and then
only under certain conditions. This intervention is inevitably causal features x(t) and y(t)) we cannot easily predict
top-down in nature (Craver and Bechtel, 2007; Auletta et al., xn at all values of r (nor K) even if yn is known with
2008). certainty itself.
11 Ecosystems are usually thermodynamically open, but
13 The Logistics Map (LM) x
causally closed with some regularity and predictability. t+1 = rxt (1 − xt ) is the first order
12 The concept of ‘regularity’ can be further restricted – e.g. approximation to the LDE using ex ≈ 1 + x − 12 x2 + . . ..
Granger causality as the measure of predictability (Sugihara 14 The Lotka-Volterra (LV) model has the form, for two chains

et al., 2012) – this does not change our argument. S1 and S2 : S˙1 = aS1 − bS1 S2 , and S˙2 = cS2 − dS1 S2 .

4

Figure 2: A model of the iterative stability of sampled
sequences of unidirectional causal graphs. This models
the causal predation of the system using the Logistics
Difference Equations (LDE) from Eqn. [6]. The model
includes self-interactions and cross-interactions where
a feature x has a unidirectional causal dependency on
another feature y, but where y is not dependent on
x. The discretized features represent realizations from
causal chains. The couplings introduce further insta-
bility and complexity. The y-axis is the feature value
(population size, strategy price, or accumulated profit-
and-loss) and is dependent on the growth factor r given
on x-axis, and the carrying capacity K. In this exam-
ple rx = r, ry = 0.95r, Kx = 0.95, Ky = 1.00 and
ay→x = −0.1; any variety of combinations can be cho-
sen. The rounding significance is ϵ = 10−4 .
As a simple representation for causal chain competi-
tion and predation, Eqn. [6] and Fig. 2 have the fur-
ther benefit of making clear the role of randomness.15
For example, either r (or K) can be changed to be
uniformly distributed, and then sampled at exponen-
tially distributed waiting times; perhaps representing
exogenous shocks from top-down causal sources from
the broader environment, either changing r, or K. We
can also randomly change the interaction terms, and so
on. These introductions of randomness do not improve
the situation and can undermine attempts to close the
system using additional filtering. In this framework,
it is unreasonably optimistic to assume that one can
meaningfully infer stable causal graphs uniquely from
the data.
That is not to say causal graphs are not useful.
In fact, for exploratory data analysis, or visualizing
the hypothesized system state, or rendering assump-
tions transparent, causal graphs can be informative
15 Difference equations can be thought of as filters, this implies
that erratic behavior due to sampling could be ameliorated using
filtering e.g. low pass filtering.
5
and should be encouraged. However, even if causal
chains are unique and can be reliably extracted, this
does not imply that the representation can faithfully
render the dynamic properties of the system itself.
In an open system, causality ultimately remains phe-
nomenological. Markets are reflexive, adaptive and
saturated with agents responding strategically to each
other. It is thus understood that coherence of percep-
tion around a common cause will often lead to forms
of tight coupling with high cohesion, and thus fragility,
being written into the financial system itself.
4 Conclusion
Research may retrospectively support unidirectional
chains of causality and their corresponding inference.
However, the conditions in which ex post understanding
can be extended to support ex ante prediction are lim-
ited. This is caused by the market’s adaptation mech-
anism combined with the understanding that chains of
causality are malleable by market actors. This neces-
sitates a distinction of practical significance between
“model estimation”, wherein the model is presumed
to be normatively true and the data representative of
the future, and “model calibration”, where one rather
seeks to facilitate reliable decision-making under un-
certainty using a model that may be misspecified or
simply incorrect. This theme – a default necessity for
calibration despite the presence of ex post confidence –
is well-known from derivative pricing (Schoutens et al.,
2004). It is unlikely that these chains can be used
without considerable risk for prediction or control in a
forward-looking way.
If reflexive, the degree to which markets behave as
a closed system is likely to be a function of only teleo-
logical conviction. This means that there may well be
nothing tangible that supervenes various model repre-
sentations. To the extent that certain QF actors dom-
inate markets, a causal chain supporting their partic-
ular narrative will become established. The risk then
exists of other actors benefiting from distinct causal
chains coming to bear. The system is therefore prone
to instability even in the absence of exogenous shocks.
In the age of hyperconnectedness, the shifting of per-
ception and sentiment has never been as fungible, or as
inexpensive.16 It should be anticipated that without a
more complete theory of complexity, QF will remain
lost in a spiral of tautological self-reference.
As scientists, and as academics of QF, we naturally
aspire to high standards of critical thinking. Despite
markets exhibiting unusual epistemic dynamics, scien-
tific reductionism in QF is deployed as an inviolate pre-
scription. However, the assumption of unidirectional
causation will not always lead to the appropriate causal
inference. In contrast, within a highly reflexive system,
the pursuit of causality may, in fact, be doomed to fail-
ure.
Empirical finance may frequently find itself searching
incorrectly for answers under the only epistemological
16 Baudrillard (1981) called this the ‘precession of simulacra’.
light within which it can navigate. To the extent that
markets closely proxy closed systems, the risk of violat-
ing directional causal assumptions is arguably limited.
Yet, if markets do have the proclivity to ‘switch’ be-
tween different casual directions (as in Fig. 2), QF is
presented with an existential challenge. In such a sce-
nario of overt reflexivity, empirical finance is expected
to awaken within a deeply paradoxical associational rel-
ativity. Here, as in other contexts, realistic attempts
at hypothesizing more complex causal models will be-
come multifaceted and are less likely to give rise to
useful inference (Rasmussen et al., 2019; Saylors and
Trafimow, 2020).
None of this is novel in the real-world application
of QF i.e. in option pricing, trading and asset man-
agement. One of the early approaches to dealing
with the causation problem in factor investing – path-
dependencies and unidirectional dependencies – was to
introduce ad hoc models, such as those of Haugen and
Baker (1996) and Ferson and Harvey (1999), and relax
the linearity assumption of the pricing kernel (Wilcox
and Gebbie, 2015). This early modeling of dynamic
temporal and multi-layered dependencies may appro-
priately be couched as attempts at “machine learning”
and are not essentially inventive, nor do they progress
the central argument here. Hence, we deliberately
avoid discussion of the “data-science problem” or the
merits or fallibility of any specific algorithm. The ve-
racity of modeling tools in reflexive systems takes on
a life of their own, and invariably has less to do with
any computational tool or trick, and more to do with
the nature of adoption and dissemination of the same.
The fundamental nature of the problem remains, irre-
spective of what tools are fashionable.
We believe causal and scientific thinking may ulti-
mately be limited within the prescription of current
QF tools for two reasons. The first presupposes that
markets are not sufficiently reflexive to matter and re-
ductionist approaches assuming unidirectional causal-
ity are valid. Within this paradigm, causal inference
is limited to ex-post, unless the phenomenon under
study is non-arbitrageable.17 The ability to forecast ex
ante (cf. to calibrate) may ultimately be a rarity, and
QF should be cognizant of overreach elsewhere. Ar-
guably, this understanding would accomplish much of
the clean-up required within QF. The second limitation
is that statistical and causal inference will plainly be
applied incorrectly where reflexivity is present.18 For
these reasons, we argue that empirical finance is not at
risk of becoming a pathological science (sensu López
de Prado (2015)). Rather, empirical finance is cate-
gorically a pathological science where it is able to act
as one at all (i.e. where not sufficiently reflexive to
matter), and patently not a science elsewhere.
We suspect that the disparity between the two broad
schools of economic thought is dialectical, being two
sides of the same causally confused coin. Regardless,
17 See Hardin (1968)’s ‘tragedy of the commons’.
18 The
mechanism by which reflexivity may facilitate arbitrage
and the persistence of the same in markets is worthy of further
study.
6
the risk of causal predation (and conditions of causal
chain co-existence) are not satisfactorily assimilated in
current thinking. It is clear that QF (and economics
more broadly) would benefit from a better understand-
ing of what knowledge is likely to be impacted by such
reflexivity, and consequently the risks of attaching pol-
icy intervention, regulation or investment to the same.
5 Acknowledgements
We thank Diane Wilcox and Michael Jennions for en-
gaging conversations on the topic. The views expressed
here are solely those of the authors.
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