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16 Jan 2020 
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Using mathematical models to understand financial markets is one of the ambitions of rationalism. In order to develop the comprehension of the market, the economic sphere must integrate knowledge to understand it. According to rationalism, the main way to acquire knowledge is through the process of deduction. On the other hand, mathematical models are based on undisputable axioms from which knowledge is deducted (Van Willigenburg, 2012). Consequently, the use of mathematical models can lead to a global understanding of the financial markets because they offer enough knowledge to the economic sphere. Finally, we can think that mathematical models are reliable because their statements and shapes of reasoning are undeniable.
Nevertheless, the relationship between mathematical models and financial markets can be described in the social science field, using the ‘double hermeneutic’. It is the relatedness between the theory and the practice (Goshal, March 2005). Here, the theory is that mathematical models are used in financial markets to predict values in the future. In addition, these models, which are an approximation of the reality, are not wrong but they are constructed on hypothesis than can be wrong. Furthermore, society is firmly convinced of the truth of these models, so it uses them in the market place every day. So, according to the ‘double hermeneutic’, the more mathematical models are used, the more they become true. The theory, regardless of its thrust, is applied (Goshal, March 2005). This relation can be illustrated by the Black-Scholes model. This model aims to fix the price of options. When Black and Scholes published their model, there were not any other alternative ways to do it, so it was used. This model admitted that the degree of variation of the price of an option of the same stock at the same time is constant. In reality, it is wrong but when the model is used, it becomes true (Kenton, September 2019). So, the equation creates the reality. Consequently, markets are using a “wrong”
Moreover, the use of mathematical models in financial markets creates some threats. The first is incomprehension. Although deduction can lead to a comprehension of models, they are becoming more and more complex and they trade at the speed of the light, which is impossible for the human brain to keep up with. They create a sense of control and reliability, but none of them are real because the market uses wrong models daily. Secondly, they don’t take into account the social perspective. In fact, behind the numbers there are people, but the reality is disappearing due to mathematical models (The Alchemists of Wall Street, n.d.).
In conclusion, the use of mathematical models in the financial market is a way to secure the economy because they can treat lots of data, and they are shaped through deduction, which is, according to the rationalism a criterion of the truth. However, used models might be wrong and their complexity in addition to the lack of humanity make them less reliable.