Methodology and finance

The relationship between science and methodology (philosophy of science) is reciprocal. Methodological concepts can be used to describe, to evaluate, and even to guide scientific activity. In discussing philosophy of science, real-life science can be used to clarify, to illustrate, and even to evaluate competing methodological positions. This paper analyzes the reciprocal relationship between methodology and financial economics.Two different philosophical positions are presented, contrasted, and related to two different branches of financial economics. Capital market theory is tentatively evaluated on the basis of both positions. The evaluation shows that - and why - capital market theory can be considered as a successful research programme. As a methodological case study it also demonstrates that - and why - traditional methodological concepts are largely inappropriate to finance. The alternative methodological position presented in the paper is found to be better suited.These results are then used to investigate whether methodological arguments imply that a behavioral approach to business finance should be preferred rather than an economic approach. The traditional methodological position rejected in this paper does support a behavioural approach, while the position favored in the paper does not.