The role of theory in finance research

Itay Goldstein

The Financial Review, 2025, vol. 60, issue 3, 657-666

Abstract: Over the years, a big part of research in finance has been directed toward the development of new theories based on mathematical formalism. I review classic examples demonstrating the success of this approach, how it enabled transformation in analysis, and had spillovers to measurement, policy, and practice. I discuss the limitations of mathematical models and how these models should be evaluated. Finally, I argue that, despite the greater prevalence of data and empirical methods these days, there are still many opportunities for theory research. I provide some examples. Enabling these opportunities is critical for the continued progress of the field.

Date: 2025
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