The Importance of Positivism in the World of Finance

Pages: 8 (2262 words) Published: April 20, 2013

According to Little (2005), philosophy of social science is a scholarly discipline that attempts to analyse the logic, methodology, modes of explanation of the social sciences, in which its studies include psychology, sociology, anthropology, history and economics. Social science provides understanding of everyday interactions of individuals and interactions among human society in social institutions. Providing prediction and explanation for human behaviour and its consequences are some of the main aims of social science (Rosenberg, 1988).

The purpose of this paper is to examine how philosophy of social science can help in explaining speculators’ behaviours. This paper is divided into five sections. It will begin by explaining the speculative behaviours of stock traders on lottery type of stocks, the probable data source and methodology. This will be followed by introducing the concept of positivism and identifying the reasons for selecting positivism. This paper will also provide some criticisms to positivism. Lastly, the paper ends with a summary.

Speculative Behaviours of the Stock Traders in Lottery Type of Stocks

My research will be mainly focus on the speculative behaviours of the stock traders, such as fund managers and retail speculators on lottery type of stocks. Speculation is different from investment, in which according to Peers (2003), On the one hand, speculation involves taking large amount of risks attempting to earn quick profit. Speculation is a game where expected return and risk are both indeterminate. As a result, speculators need to take relatively large amount of risk with respect to attempt to predict the future. A simple example of speculation is purchasing gold. Speculators might think that buying gold is a better use of money due to the inflation. Since gold depends more on inflationary rate and relies less on global economy, buy gold during period of financial crisis will help speculators to generate quick profit. However, gold prices are now extremely high, and there is no guarantee that prices will keep increasing in the future. Since there are huge fluctuations in gold prices, speculators are very likely need to bear large amount of risk when they purchased gold.

On the other hand, according to Taylor Frigon Capital Management LLC (2007) investment involves analyzing the future earning and the preference of participating in those future earnings. The expected future value of investment is higher than the cost of the investment. Expected future value takes into account for all of the potential good or bad events multiply by the probability of those events. Investors usually search for definable expected future value, minimize risk and investors have nominal risk aversion, which means that investors will prefer a more guaranteed payout and the uncertain one, otherwise, investors will need a higher expected returns in order for them to undertake the risk.

Using the gold example to differentiate investor and speculator, investors purchase gold and hold it for decades, because after couple of decades, the returns from selling those amounts of gold will be higher than the initial cost of buying those amounts of gold, even after subtracting the returns from the transaction costs. Furthermore, gold will still be considered as one of the most precious metal after couple of decades. Investors do not need to worry that the value of gold will worth nothing, thus expected future value is more guaranteed and risk is minimized to some extent. Speculators purchase gold during the periods of financial crisis, and sell gold in order to buy stocks during periods of bubble. This strategy can help speculators to generate quick profit, however, it is extremely hard to predict when bubble or crisis will occur, and this uncertainty might cause speculators to experience huge amount of loss as well.

Lottery Type of Stocks

According to Kumar (2009), some stocks are classified as...
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