Vlog: Process Finance

Compelled by the hard problem of asset pricing, I have been running a backpropagation through the neural network in my brain. And I have been ruthlessly updating the weights on nodes regardless of how deeply the nodes are embedded inside my web of beliefs.

The backprop reached Walras (1874) in my last update in April 2024 (Vlog: Systems Finance). Since then, I have kept on pushing backward. 

Walras (1874) was not bothered by Clausius’s (1850) second law of thermodynamics or Darwin’s (1859) “Origin of Species.” And Boltzmann was just starting to publish articles that elaborate his probabilistic interpretation of the second law. Quantum mechanics and general relativity were both at least 30 years in the future. All these scientific developments put tremendous pressure on mechanical philosophy. Alas, Walras hardly felt any such pressure and enthusiastically embraced his fellow Frenchmen, Rene Descartes and Pierre Gassendi.

Descartes and Gassendi revolted against Thomistic scholasticism, which descended from Aristotle’s hylomorphism. An acorn grows into an oak tree because the former has the potentiality (matter) to become the latter actuality (form). Mechanical philosophers wanted nothing to do with formal and final causes, which represent occult powers to them, and retained only efficient causes.
 
Consequently, change is very limited in mechanical philosophy. Change is only locomotion of tiny, indivisible, and eternal atoms. For Newton, what’s the difference between his apple and Jupiter? Nothing. Jupiter is just a gigantic apple. You can aggregate mass easily.
 
Walras has bequeathed to us all the limitations of mechanical philosophy. What’s the difference between an individual and society? Nothing. Society is just a gigantic individual. Everyone knows nonlinear utilities do not aggregate. Alas, we are stuck because of no viable alternative.
 
Macro Finance is defined by its all-important questions, not by the representative agent. I am revolting against the representative agent, not Macro Finance. 
 
Formulating a viable alternative is challenging. In epistemology, all core beliefs cohere (interlock). Once I start to replace aggregation with emergence, which is the antithesis of aggregation in philosophy, rational expectations must go. Emergence means novelty, new causal powers, radical uncertainty, and perpetually incomplete markets. In Savage’s large world, only ecological rationality is feasible. God has not endowed us with his God’s eye-view of the world.  
 
And emergence occurs in time. Time has an arrow. The world is a process, not an equilibrium.
 
In the 2,500-year debate on being vs. becoming, Walras has taken the most radical position on being that would make Parmenides proud. A static theory of equilibrium has been overthrown in physics by the big bang theory since the 1960s. Darwin overturned it even earlier in biology. While our genes have not changed much in the past one million years, think how much of our lives have changed since ChatGPT showed up just a few years ago.

The equilibrium theory of economics is deeply wrong. 
 
Time for us files to fly out the fly-bottle.


I elaborate on these developing ideas in my recent Keynote presentation titled "Corporate asset pricing: A process theory of finance" at Fidelity's Distinguished Speaker Series on September 26, 2025.  

Please see slides and video recording below. I am very grateful to Dr. Roy Zhang for the kind invitation.