1
$\begingroup$

What is the difference between finance and financial economics?
E.g. we have tags for both* and I wonder when to use which, but not only.
*And one more on financial markets – see this thread on Meta Economics SE.

$\endgroup$
2
$\begingroup$

Virtually same question was already addressed at quantitative finance stack by user Matthew Gunn. The answer there can be summed as:

Financial economics is what economics calls finance. Finance is what finance calls finance.

Less flippantly though, there's a long debate on whether finance is a subfield of economics, ... Prof. Milton Friedman famously opposed awarding Markowitz a PhD in economics from the University of Chicago for his portfolio theory because while Markowitz's work was brilliant, Friedman didn't consider it to be economics. ... Myron Scholes also express views that finance is to some extent distinct from economics.

By many economists finance is not considered to be part of economics but rather to be a separate discipline. For example, according to Journal of Economic Literature (JEL) classification (which is authoritative source for classification in economics), there is no sub-field of finance in economics. There is only subfield of financial economics. This classification has a following guideline:

Guideline: Covers studies about issues related to various sub-fields in financial economics: general financial markets (both domestic and international) dealing with securities (stocks, bonds, and commodity and other futures); financial institutions and services; and corporate finance and governance.

This is something that probably most people who are in finance would recognize as subject matter of their field.

However, I would argue there is a subtle difference. People who study finance often do that in more practical way with larger emphasis placed on analysis from the investors/financial firm point of view and applying concepts to some particular cases. While financial economics focuses much more on generalization and studying financial markets from much wider perspective than would be necessary for practical operation of financial firms. I will use a crude analogy but I think it is at least partially correct, many economists would consider economics to have similar relationship with finance as physics and engineering or biology and medicine. This is admittedly a crude analogy as I think when it comes to finance/financial economics the distinction is more subtle and less obvious but that is the best analogy I can think of.

$\endgroup$
2
  • 1
    $\begingroup$ I think the first two sentence of Matthew Guns' answers sum it up best. Regarding your proposed analogies, would Finance roughly correspond to Applied Financial Economics? $\endgroup$ – Richard Hardy Dec 30 '20 at 14:50
  • $\begingroup$ @RichardHardy yes I think that is probably even better analogy/description $\endgroup$ – 1muflon1 Dec 30 '20 at 14:51

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.