Financial socialism: The role of financial economics in economic disorganization

A growing body of research shows evidence that financial economics played a significant role in recent financial crises, such as the subprime mortgage crisis, Enron and Long-Term Capital Management. This track record is a wake-up call for managers and investors who employ financial economic models. This paper demonstrates how financial economics decouples market prices from the valuation by customers and resource owners in a systematic way. As an organization principle, financial economics replaces value-driven investment by a theory-driven ruling of anonymous financial markets - a scenario warranting the title "financial socialism". Implications for customer valuation, financial accounting, and a maxim for the sound application of financial economic models are presented. (C) 2013 Elsevier Inc. All rights reserved.