View source for Finance:Principled reasoning

{{Short description|Mathematical framework}}

'''Principled reasoning''' (also known as '''principles-based reasoning''' and '''principle-centered reasoning''') is an alternative to [[Finance:Modern portfolio theory|modern portfolio theory]] based on a different conception of risk.

==Concept==
Modern portfolio theory, according to its founder, [[Biography:Harry Markowitz|Harry Markowitz]], equates risk with "variance of returns."<ref>[https://www.jstor.org/discover/10.2307/2975974?uid=3739864&uid=2&uid=4&uid=3739256&sid=21101824378903 "The Journal of Finance, Vol. 7, No. 1 (Mar., 1952), pp. 77-91"]</ref> Principled reasoning offers a critique of modern portfolio theory and its related departure from classical economics in evaluating markets in isolation from production and consumption.<ref>[https://www.nobelprize.org/nobel_prizes/economics/laureates/1990/markowitz-lecture.pdf "Foundations of Portfolio Theory"]</ref> Principled reasoning holds that risk is partly a function of failure to adhere to foundational principles of national prosperity in the country of domicile of the investment.

==Foundational principles==
Principled reasoning contrasts with modern portfolio theory's Humean [[Philosophy:Philosophical skepticism|skepticism]],<ref>[http://www.worldmag.com/2011/08/no_safe_havens ""No safe havens, WORLD Magazine"]</ref> drawing instead on the Sermon on the Mount. Principled reasoning holds that a community which honors the proper cultural, legal, and economic principles is like a house built on rock, which puts it at an inherently lower level of risk, while a community which does not honor the proper principles is like a house built on a foundation of sand, and is at inherently higher risk. The risks associated with lack of principle adherence are not, according to principled reasoning, necessarily or even usually manifested in the short run, but may take long periods of time to manifest in visible form.<ref>[Forbes Magazine, February 2012, page 30]</ref>

Principle reasoning is associated with the economist Jerry Bowyer, investment strategist Vince Birley, and theologian Ken Boa, who presented the idea at the annual conference of Kingdom Advisors and collaborated on a book on the subject.<ref>["Foundational Principles on Economics and Investments", Sep. 2011]</ref>

==References==
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<!--- Categories --->

[[Category:Financial economics]]
[[Category:Finance theories]]
[[Category:Investment]]
[[Category:Portfolio theories]]
[[Category:Financial risk]]



{{Sourceattribution|Principled reasoning}}