Saturday, September 13, 2008

The standards of proof

I took the opportunity to ask respondents what method they would recommend for corporate capital budgeting. Table 7 shows that the CAPM is recommended by 265 out of 360 respondents. The strong theoretical underpinning of the CAPM seems to outweigh the fact that it has almost no empirical evidence supporting it. In contrast, the Fama-French model, which lacks a strong theoretical underpinning but performs well empirically, can garner only 41 supporters.
--Ivo Welch, "The Consensus Estimate for the Equity Premium by Academic Financial Economists in December 2007," documenting another example of scientific belief being driven by something other than empirical "proof." See also my thoughts on the scientific method and religious faith here.

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