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This chapter provides information about the changes introduced in stock markets across the United States after the financial crisis of 1987 with increased emphasis on trading derivatives of stocks and other financial assets in place of stocks only. Derivatives started trading on the U.S. stock markets in the 1970s with a minor share, but gained popularity among share traders and stock brokers after the financial crisis of 1987. The chapter also focuses on exploring the emergence of modern economic theories of financial markets in the United States and other countries. These theories were mainly based on financial economics, which was composed of the mathematical models of markets.

This chapter reveals how financial economic theories and models were developed in various research universities and were applied to financial markets across the United States. It also examines how these models were used to implement certain procedures and changes in the financial markets of the country. The chapter finds that in the 1960s and 1970s, financial researchers studied and referred to works of earlier researchers to develop suitable theories and models for the domestic financial markets. Research students from the University of Chicago and the Massachusetts Institute of Technology also played a key role in developing theories and models that significantly influenced market practice within the United States.

This chapter considers the career of William F. Sharpe who received the Nobel Prize in 1990. Sharpe was born in 1934 and received his B.A., M.A., and Ph.D. all from the University of California. He started his career in 1961 as assistant professor at the University of Washington. From 1967 to 1973 he worked as a professor at several other universities. He was then later appointed Timken professor emeritus of finance and professor of finance, emeritus, at Stanford University. His comparative advantage lay in his development, application, and communication of practical theory. His focus was on financial economics, concentrating on investment applications through the integration of existing ideas rather than the development of new ones. His publications include Portfolio Theory and Capital Markets and Fundamentals of Investments.

Chapter 1 analyzes how the Gaussian distribution became the cornerstone of financial economics. It roots the first origins and justifications of this distribution in the works of Jules Regnault (1863), a broker’s assistant, and the mathematician Louis Bachelier (1900). After having highlighted the advent of financial econometrics and its role in the first days of financial economics, the chapter also discusses how this field progressively became an academic discipline based on the combination of the probability theory with the statistical description of empirical data. Afterwards, we clarify the link between the theoretical foundations of financial economics and the efficient-market hypothesis generally (wrongly) associated with the random character of financial data.

This chapter presents an empirical characterization of affect-laden networks in the context of financial economics. It points out how other disciplines will generate different affective dispositions and how its analysis on financial economics provide a set of sensitizing concepts with which to identify these dispositions. The chapter also focuses on two debates from an early stage of financial economics and uses this comparison to highlight how stylistic changes and the emergence of a standard of reasonability helped settle conflicts within the discipline and turn data analysis into the apex of what became the data–method–theory triad. Financial economists developed this mode of constructing credible arguments where data analysis played a new role by the late 1970s. It explains how data analysis should be reasonable rather than exact or objective and how these methods should be simple and easily derived from the existing analytical toolkit of statistics.

More often than not, the debate on HRM and performance is limited only to the notion of business performance in the context of financial economic terms, and this does not justify the concept of performance in the field of performance and HRM. Previous chapters have been able to discuss the notion of performance in terms of various types of rationality. This chapter attempts to construct a perspective on the performance concepts that covers more ground through first discussing how various practitioners and academicians have contributed to the study and conceptualization of performance. The chapter identifies the various conceptual models and theories involved. Finally, it tries to determine the missing elements so that a perspective that accounts for the distinguished professional, societal, and strategic dimensions of performance can be derived.

This chapter shows quantitative data on the development of collaboration in financial economics and its relationship with success in the field, thereby reconstructing the structure of the network that reasonableness and simplicity helped bring together. It emphasizes that financial economists tended to collaborate with the same people, repeatedly. They worked in small groups and, as a result, participated in an economy of affect in order to repurpose a term from Lorraine Daston that privileged the communicability and interdependence of their findings rather than their precision or accuracy as the centrality of data to what they did might suggest. The network of financial economics came to value communicability and interdependence along with reasonableness. The chapter uses a dataset of study papers, as well as bibliometric and network data to present systematic, quantitative evidence about the kind of social structure that sustained the affective dispositions.

This chapter demonstrates how significant changes have been introduced in the syllabus of financial economic studies at universities across the United States. It finds that financial economics has been transformed from a predominantly descriptive and institutional academic discipline to a more analytical, economic, and mathematical model-based subject being taught at different universities across the country. These changes have been introduced in academic financial economics due to the extensive efforts of prominent economists, financial researchers, and random-walk and efficient-market assumptions. Research works of economists and financial experts have also played a key role in transforming financial economics into a relevant modern analytical and mathematical academic discipline at universities across the United States. This analytical academic discipline has helped students of financial economics to adopt a more practical approach to analyzing and studying developments within stock markets.

This chapter divides the scientific status of the discipline into two empirical questions concerning the degree to which finance is scientific and the kind of science financial economists pursue. Focusing on articles published in the Journal of Finance between 1950 and 2000, the chapter investigates the forms and practices financial economists came to rely on to communicate their results to one another. It also documents the ways in which financial economics changed as mathematics and statistics became dominant, and how mathematics and statistics changed the affective dispositions of financial economists. The chapter analyzes how financial scholars used specific communicative practices and inscription devices as a function of how they conceptualized expertise. It draws the more general lesson that techniques of quantitative analysis are no substitute for relationships of trust among knowledge producers, while pointing to the limited role numbers play in the construction of social knowledge when they are not backed by social relationships.

This chapter highlights the distinctive approaches adopted by earlier and younger economists in studying and teaching financial economics as an academic discipline in universities across the United States. It finds that earlier economists adopted a more theoretical and institutional approach to studying and teaching financial economics while the younger economists relied on a more analytical and practical approach to studying this academic discipline. An increasing number of research universities started focusing on adopting an analytical and practical approach to teaching financial economics in the United States from the 1970s with the availability of the required study materials and books.

The true problem of economics is when economists fall in love with their models to such a degree that they try to force reality to comply with the models by influencing rules and regulations. The unintended consequences are catastrophic, and no more so than in finance. The reason is that financial markets are the area most easily captured by aesthetically pleasing mathematical models, while at the same time not being a true market (a fact too often conveniently forgotten). Currently, this phenomenon of trying to force reality to conform with theory moved into its periodical extreme, with the financialization of the economy. Financialization views all economic activity as a set of financial transactions, including viewing corporations as financial assets that should be maximized in the short term. With investors and courts now treating theories as shareholders’ value and efficient-market hypothesis (EMH) as the legal yardsticks with which to judge executives’ behavior, those who aim at sustained growth and prosperity find themselves in a perfect storm. The combined effect is that the ability of public companies in the United States to invest capital in large-scale productive assets with the aim of ensuring long-term growth is significantly curtailed. Further, it is quite clear that we cannot do anything to change this in the foreseeable future. Consequently, regions need to creatively engage with the system, trying to create a “financial space” that will allow their companies to scale-up, grow, and produce the jobs and prosperity they seek.

This chapter explores the effect of stock market swings and the economics of financial markets. Using over twenty years of data prior to the Great Crash, the chapter takes a look at firm-level innovation during the event of major swings in financial markets. These swings are then correlated with possible changes in investor forecasts on the value of fundamentals. The study reveals that intangible capital created a shift in investor psychology during the 1920s and thus investors were more responsive, hence encouraging the growth of the stock market and creating large stock market payoffs for innovation. Technological change is thus concluded to trigger boom in the stock market, and that the 1920s stock market boom can be viewed as investors’ response to the growth of intangibles.