Subjective probability and financial valuation: contrasting paradigms

Abstract

Purpose – The purpose of this paper is to theorize the existing idea of subjective probability a la Keynes’s Treatise on Probability Theory. Then to show that, under the especial kind of financial valuation model in the absence of interest rate and speculation, subjective probability is not of a major concern in Islamic financial theory. Design/methodology/approach – The topic is of an epistemological nature premised on the Islamic unity of knowledge and the world-system with special attention given to the formulation of the financial model for evaluation under its unitary characteristic at each time period of financial evaluation. The approach, while being epistemological, is also mathematical in the financial valuation field. Findings – Mathematical calculation of approximate solution using Newton-Raphson method applied to Islamic financial valuation model with yields, evolutionary learning and of the nature of unitary discursive experience at every stage of valuation taken continuously establishes the innovative method approximating subjective probability of events to limiting negligible field. Practical implications – The nature and importance of Islamic valuation models brings about the implication of diversification of risk and production diversification that altogether underlie the limiting phenomenon of subjective probability in a narrow closure. Social implications – The epistemological implication of unity of knowledge and unity of the specific events during the valuation experience causes the socio-economic system to gain increasing levels of stability and certainty while subjective probability narrows down in its small closure. Originality/value – This paper is boldly original in the light of its methodology that addresses the much pursued topic of subjective probability in the Islamic heterodox economic and financial field.