The Arrow Debreu construct Sharpe refers to is the contingent contract, an agreement in which the transfer of goods or money is contingent upon a predetermined condition like time or weather. It introduced the element of risk to financial economics. Getting back to basics himself, Sharpe posits an economy in which there is no currency and apples are the only good. The only source of risk is the uncertainty about next year's weather. Using the apple market as a model, he illustrates valuation, replication, the construction of swaps, and a host of other financial concepts.
Financial engineers can now reshape future contingencies into many different patterns.
Investors are thus faced with larger and larger menus from which to choose. More than ever, it is important that they have as clear an understanding as possible about the determinants of the security prices that form the inputs for the activities of the financial engineer. Nuclear financial economics, concerned as it is with 'first principles,' can provide a solid base for such an understanding. The emerging academic area of human resources management is a place where economics and organizational behavior meet. In a paper published in the Journal of Political Economy , economists Eugene Kandel and Edward P. Lazear enter the province of organizational behavior when they analyze peer pressure in partnerships and in companies with profit-sharing plans.