Tuesday, January 25, 2011
Robert Shiller points to a contradiction: There never was so much interest in popular economics while economists, on the other hand seem, to have lost credit among the general public. The reason for that, Shiller says, is that economics has become more sexy because it has become more open.
After a decade of intense use of mathematical models and prior to the current financial crisis, financial economists thought of themselves as physicists. Science had won, thanks to the efficient market hypothesis. And Bachelier. But the financial crisis showed us that the models were not only misused, but were clearly inappropriate to capture fully the securities' price movement of stock markets. This crisis should have never happened according to these models. The overconfidence in scientific financial economics, because, huh...it's not like it's the first time predictions are wrong. Theoretically the LTCM crash did not exist either, neither did many other spectacular price movement. That impressive series of miscalculation, which culminated with the present one, gives scholars like G. Akerlof an argument when pointing at the efficient market hypothesis as one of the cause for the current mess:
Something went wrong and it is legitimate to ask. The soul-searching resulting from it might be painful, but as economists realize that economics is a human science, the public seems to enjoy. It is refreshing and it sells books.