Empirical testing can only fail to disconfirm, never confirm, models like the CAPM

Evidence

William Sharpe himself conceded that Roll’s critique of the tests of his model was essentially correct. Sharpe told Institutional Investor’s reporter: “We cannot, without a shadow of doubt, establish the validity of the capital asset pricing model.” (Wallace 1980, p. 24) Stambaugh’s study meant that the Capital Asset Pricing Model is “maybe OK after all,” says Sharpe (interview). Nevertheless, in his view that kind of empirical defense against criticism of the model misses two deeper points. First, “nobody can confirm a hypothesis” such as the CAPM. “You can only fail to disconfirm it.” (Sharpe interview) Second, statistical difficulties (such as the large sampling errors in estimating the average return on a stock), economic and historical change, and variation across countries render empirical findings in this area unstable. — Donald MacKenzie, An Engine, Not a Camera, 408

Categorization

• DEFINE: Sharpe’s Popperian formulation of what empirical testing can and cannot establish is a compact statement of the falsificationist stance underlying the whole performativity debate — crucial vocabulary for the intermediate reader.
• XREF: Connects to the broader performativity literature and to falsificationism in philosophy of science; also to how model builders defend models that empirical tests cannot cleanly refute. — connects to: CAPM and market efficiency tests cannot be cleanly separated empirically. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 110; Financial models survive despite known false predictions when they remain useful. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 60; Fama attributed anomalies to CAPM flaws, not market inefficiency. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 430 (+6 more)

Broader Connections

• Methodological critique can disprove a proof but never disprove a theory #expands (0.75) — John T. Jost and Jim Sidanius, Political Psychology, 642