William F. Sharpe

""Any graduate of the ___ Business School should be able to beat an index fund over the course of a market cycle." Statements such as these are made with alarming frequency by investment professionals. In some cases, subtle and sophisticated reasoning may be involved. More often (alas), the conclusions can only be justified by assuming that the laws of arithmetic have been suspended for the convenience of those who choose to pursue careers as active managers."

"From a more theoretical viewpoint, one can focus on the nexus between the present and the future. A financial instrument typically represents a property right to receive future cash flows. Such cash flows will, of course, come in the future – hence the economics of time must be understood. In many cases the flows are uncertain, hence the need for an approach to the economics of uncertainty. In addition, cash flows in the far future may depend on actions taken (or not taken) in the near future. This gives rise to the need for a theory of the economics of options (broadly construed). Finally, one needs information to estimate likely future outcomes, hence the requirement for an understanding of the economics of information. I define financial economics so that it embraces all four of these important, difficult, and fascinating aspects of economics."

"The central question for positive financial economics is valuation – what is the value today of a set of future prospective cash flows? The central question for normative financial economics is the appropriate use of financial instruments in a world in which values are set wholly or partially in accord with the principles of positive financial economics."