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The purpose of this paper is to use some of the contributions of the option pricing theory to solve three outstanding puzzles in finance: the underdiversification puzzle, the volatility puzzle and the equity premium puzzle.

To approach the issue, this paper considers the applications of the option pricing theory to both sides of the corporate balance sheet. Applications to the left-hand side of the balance sheet has led to the real options theory that has expressed the value of a capital budgeting project as the sum of the values of its “discounted cash flow (DCF) method” and “real options.” This paper argues that, because the balance sheet must balance, the value of equity, which appears on the right-hand side of the balance sheet, should also be expressed as the sum of the values of its “DCF method” and “equity options.”

This proposed model of equity valuation solves the three outstanding puzzles in finance: the underdiversification puzzle, the volatility puzzle and the equity premium puzzle.

This study may not be able to explain the full extent of the three puzzles.

The dividend discount model of equity valuation needs to be augmented by an option component.

The community of finance scholars will become more confident of their scholarly work because three puzzles will be solved to a great extent.

To the best of author’s knowledge, the extant literature does not either solve any single one of the three puzzles through the contributions of option pricing theory or solve all three puzzles at the same time with a single solution. The originality of this paper is that it makes both of these contributions to the extant literature.

There is a question that both business people and academics the world over ask themselves of each other at least once in their respective careers: how can we utilise for our benefit what you do? The businessman or woman will wonder at all the brain power being put to use to study economics, accounting or management disciplines and think there must be something from their work that could be used to improve business practice. Similarly, academics wonder at all that raw data out their in the real world, and how if only they could get their hands on it how their research would be improved. In his learned article ‘On the theory and practice of finance’, US academic Kavous Ardalan claims that, quite simply, there is already a massive transfer of knowledge from one sphere to the other through the use of finance and economic theory by professionals, picked up in the early part of their careers from a variety of sources. Not only this, but Ardalan argues that these theories in effect have ‘become’ reality as they have been adopted in the financial markets of the world.

It is now common for finance textbooks to discuss the concepts of the CAPM, diversification benefit, and systematic risk, as measured by beta. The purpose of this paper is to clarify aspects of these concepts and make the textbooks readers aware of them. In particular, this paper seeks to: (1) clarify the notion that “diversification reduces risk,” (2) provide geometric expositions and algebraic expressions of portfolio benefits in the context of both total risk and market risk, and (3) improve the interpretation of beta.

The purpose of this paper is to see how educational philosophies that underlie lecture and case methods of teaching are related to setting course goals, objectives, and contents.

This paper is based on the premise that foundational philosophies, worldviews, or paradigms underlie educational philosophies, and each educational philosophy favors a certain instructional methodology, which in turn implies a certain way or method of instruction.

The findings of this paper are that each educational philosophy favors a certain instructional methodology, which in turn determines not only the way that the instruction is performed but also how course goals, objectives, and contents are set.

This paper implies that differences between the underlying world views of lecture and case methods of teaching similarly lead to differences in many other aspects of the teaching and learning process.

This paper implies that in practice, faculty would set their course goals, objectives, and contents in a more consistent manner if they become consciously aware of the underlying philosophy of their teaching method.

The original contribution of this paper is that it shows how in a systematic manner the differences in teaching philosophy lead to differences in what faculty would do in all areas of their course activities: goals, objectives, and contents.

The purpose of this paper is to provide an overview of the paradigmatic context and structure of the current theories and controversies in mainstream academic finance. It identifies the context among paradigms and the structure within the identified paradigm. The paper is based on the view that worldviews underlie theories and controversies in general, and those of finance, in particular. It notes how any worldview can be positioned on a continuum formed by four basic paradigms: functionalist, interpretive, radical humanist, and radical structuralist. Then, the paper notes that theories and controversies in mainstream academic finance, despite their apparent diversity, are founded on and associated with the functionalist paradigm. Then, the paper continues with the discussion of the hierarchical structure of paradigms. It discusses that it consists of three consecutive levels: paradigm; metaphor; and puzzle solving. It looks at a sample of prominent controversies in academic finance and notes that they belong to the substructure of the functionalist paradigm. Throughout, the paper emphasizes that, in the future, mainstream academic finance should benefit from the contributions of the other three paradigms.

Finance has begun to utilize clinical approach in its research. The extent of its appropriate use is a serious point for consideration. Any adequate use of a research methodology would highly benefit from a deep understanding of its underlying worldview. This paper, therefore, discusses how worldviews underlie methodologies in general, and those of finance, in particular. It starts with a discussion on how any worldview can be positioned on a continuum formed by four basic paradigms: functionalist, interpretive, radical humanist, and radical structuralist. Next, the paper focuses on methodologies implied by the functionalist and interpretive paradigms, namely: scientific and clinical, respectively. Then, it notes that mainstream finance adheres to the functionalist paradigm. It examines how mainstream functionalist finance intends to use the interpretive clinical approach in its research. While this step towards a more balanced approach to research in finance is appreciated, the paper points out that clinical approach can be appropriately used only if certain fundamental, contextual, paradigmatic assumptions are met.

The purpose of this paper is to show how different philosophical schools of thought view the relation between globalization and culture differently.

This paper places the existing philosophical schools of thought into four broad categories: functionalist, interpretive, radical humanist, and radical structuralist. This paper then shows how each of these four broad categories view the relation between globalization and culture differently.

This paper finds that the functionalist paradigm views globalization and culture as universal, the interpretive paradigm views globalization and culture as particular, the radical humanist paradigm views globalization and culture as a domination ideology, and the radical structuralist paradigm views globalization and culture as causing conflict between classes.

This paper assumes that each school of thought can be located in one of the four broad categories of philosophical schools of thought. However, this may not be applicable to each and every philosophical school of thought.

This paper implies that one would benefit by becoming familiar with other ways of seeing the same phenomenon. This paper shows that the relation between globalization and culture can be viewed at least from four different vantage points and therefore one would have a better understanding of the relation between globalization and culture if one becomes familiar with all four different view points.

The contribution of this paper is the advice that in the era of globalization it is better for people to become open‐minded because different people from different parts of the world have different perspectives and the best way to be able to live together is to learn about how others think.

To see how educational philosophies that underlie lecture and case methods of teaching are related to how faculty perform their teaching, research, and service.

This paper is based on the premise that foundational philosophies, worldviews or paradigms underlie educational philosophies, and each educational philosophy favors a certain instructional methodology, which in turn implies a certain way or method of instruction.

The findings of this paper are that each educational philosophy favors a certain instructional methodology, which in turn determines not only the way that the instruction is performed but also how faculty perform their teaching, research, and service.

This paper implies that differences between the underlying world views of lecture and case methods of teaching similarly lead to differences in many other aspects of the teaching and learning process.

This paper implies that, in practice, faculty would perform their teaching, research, and service in a more consistent manner if they become consciously aware of the underlying philosophy of their teaching method.

The original contribution of this paper is that it shows how in a systematic manner the differences in teaching philosophy lead to differences in what faculty do in all areas of their activities: teaching, research, and service.

The purpose of this paper is to provide an explanation for the way the reality in the world of finance comes to be formed, among other things, by the theory of finance. It is based on the idea that financial behavior is not independent of the theory of finance. The paper, therefore, examines certain aspects of the academic field of finance. That is, it examines theories, PhD programs, journals, and conferences in academic finance. It notes that they adhere, almost exclusively, to a certain worldview, called the functionalist paradigm. Then, the paper discusses the role of finance graduates as employees of universities, corporations, and financial institutions in the practice of finance. In this way, the paper provides an explanation for the social construction of the world of finance.

The purpose of this chapter is to discuss the potential contribution of the option applications to economic instability. To this end, the chapter briefly reviews the extant literature on financial option pricing and its applications to corporate assets and liabilities. It focuses on the direct relationship between the volatility of the underlying asset and the value of the option. It shows that the theory of option applications by its one-sided emphasis on the value-creating role of volatility promotes excessive risk-taking. Then the chapter discusses how the theory of option applications through the educational system encourages economic agents to make excessively risky decisions. Furthermore, the interactions among these risk-welcoming agents lead to an economic system which becomes increasingly risky. This risky economy, combined with the fact that more than half of the value of the option applications is constituted by the highly volatile value of the options embedded in such applications, translates into wide variations in real investments and the economy.