Teaching Reciprocity as the Foundation of Financial Economics

Financial economics is widely regarded as "under-socialised" while the teaching of derivative pricing is often undertaken in the context of abstract mathematics. As the RCUK Academic Fellow in Financial Mathematics between 2006-2011 I was simultaneously concerned with two questions: what is the role of financial mathematics in financial crises and how to make the mathematics more relevant. The solution came out of studying the emergence of probability theory before 1700 in the context of commercial ethics where a risk less profit was seen as illicit. This resonated with the opening statement of Black and Scholes (1973), where it is argued that "it should not be possible to make sure profits". Johnson (2015) was the synthesis of these two ideas where it is argued that at the heart of the Fundamental Theorem of Asset Pricing is the concept of reciprocity, and this is developed in Johnson (2016) where it is argued that markets should be seen as centers of communicative, not strategic, action. Having outlined these ideas the talk will go on to describe how they are introduced to undergraduate and postgraduate students studying for exemptions from the Institute and Faculty of Actuaries exams focusing on the role of mathematical models in finance.