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This chapter examines the imperfect knowledge imperative in modern macroeconomics and finance theory. It argues that the Rational Expectations Hypothesis (REH) has nothing to do with how even minimally reasonable profit-seeking individuals forecast the future in real-world markets. It attributes REH's insurmountable epistemological difficulties and widespread empirical problems to a single, overarching premise that underpins contemporary macroeconomics and finance theory: nonroutine change is unimportant for understanding outcomes. It also suggests that contemporary behavioral finance models rest on the same core premise as their REH-based counterparts. Finally, it introduces an alternative approach to modeling individual behavior and aggregate outcomes: Imperfect Knowledge Economics, which opens macroeconomics and finance models to nonroutine change and the imperfect knowledge that it engenders.

This chapter assesses the impact of SRI—its market size, financial performance, and influence on financiers and the corporations they service. Overall, it finds that the SRI market remains a boutique sector, and it is too small to alter the cost of capital or otherwise exert significant influence over companies. Current market surveys using vague criteria have significantly exaggerated the size of the SRI sector. SRI faces many unresolved problems, including barriers to long-term investment, coordination of action among financial institutions, and agency problems within financial actors. The SRI retail market is also undermined by superficial, fungible standards that allow dubious practices to masquerade as responsible investments. The alternative of religious-based ethical investment offers insights into a more principled approach.

Professional traders in financial markets are generally aware of the finance theory that uses powerful analytical tools to model the operations of financial markets and the set of practitioner theories that describe trading strategies that may result in large profits. This chapter examines the relationship between the general theories of the market and the specific theories that traders use through explaining the following: the behaviours of individuals in the market and how these behaviours have effects on the aggregate, the properties of these individual theories, the notions of intuition, reflexivity, and the emergence of contrarian beliefs, noise trading, and the relationship between formal theories and the theories that are actually applied in the market.

This chapter deals with the economic analysis of market manipulation and explains its mechanics, that is, the most common methods, devices, and techniques used by manipulators to perpetrate their abusive schemes, and the economic results of the various species of market manipulation. The most common definitions of market manipulation are considered to present a new, synthetic, and workable definition of market manipulation. This definition strives to reflect the realities of modern financial markets. It incorporates, in a conceptual mode, the findings of modern finance theory, in order to facilitate the gathering and interpretation of evidence that affirms the perpetration of market manipulation. The chapter also offers a systematic classification of the various forms of market manipulation, making constant reference to the definitions and illustrations of market manipulation contained in the Market Abuse Directive and in sections 397(1), (2) (misleading statements and practices), 397(3) (misleading conduct) and 118 (market abuse) of the UK’s Financial Services and Markets Act 2000.

This chapter extends the classical approach to the theory of finance. The competitive interest rate is the price of finance determined by a normal profit rate on banking capital. This explains the correlation between the interest rate and the price level (Gibson’s Paradox) as well the persistent excess of the equity rate of return over the bond return (the Equity Premium Puzzle). As theoretically expected, the equity rate is shown to be equalized with the corporate incremental rate of profit. The corresponding theory of the level of equity prices is compared to various standard hypotheses such as the dividend-discount and FED models, and also to Shiller’s ‘excess volatility’ hypothesis which is the foundation of his claim that equity markets are irrationally exuberant. Instead, the actual equity price cycles turbulently around its competitive long-run equity level consistent with the classical theory and with Soros’s notion of reflexivity.

This chapter analyzes the relationship between corporate irresponsibility and traditional stockholders, and discusses a study which reports that there are approximately 50,000 people engaged in day trading every single day. These investors have a profound effect on stock prices and market volatility, trade solely on rumor and volume, and care nothing for, and know nothing about, the corporations in which they invest. The chapter discusses the idea that modern finance theory supports the thinking of day traders, at least to some degree. The theory holds that corporate stock is nothing other than a measure of its risk in relation to that of other stock, and that the way to handle this risk is to develop a diversified portfolio of securities. The chapter also analyzes the role of the equity markets in detail.

During the last two decades, the issue of the most effective regulation of political finance, and the prevention of corrupt practices in the public sector, has risen to the top of the governance agenda for the international community and for many domestic reformers. To address this challenge, this book focuses upon three questions: (1) What types of public policies are commonly employed to regulate the role of money in politics? (2) What triggers major political finance reforms? (3) “What works,” what fails, and why, when countries implement reforms? Section 1.1 of this chapter describes the evolving research agenda on money in politics, highlighting important advances during recent decades. Section 1.2 establishes the conceptual typology, which identifies four common public policies used to regulate political finance in states worldwide Section 1.3 outlines how the book explores these issues. Section 1.4 provides a roadmap of the rest of the book.