Table of Contents:
Roman Frydman and Michael D. Goldberg, "An Economics of Magical Thinking" (pdf,51KB), Financial Times, September 23, 2009.
"When the crisis came, the serious limitation of existing economic and financial models immediately became apparent. Arbitrage broke down ... markets froze ... market participants were gripped by panic. Macro models failed to predict the crisis and ... [to explain] what was happening ..."
"[In] the face of crisis, we felt abandoned by conventional tools. ... The key lesson ... is the danger of relying on a single tool, methodology or paradigm. The atomistic, optimising agents underlying existing models do not capture behavior during a crisis period. Agent-based modelling ... allows for more complex interactions between agents. ... we need to better integrate the crucial role played by the financial system into our macroscopic models."
"I would very much welcome inspiration from other disciplines: physics, engineering, psychology, biology. Bringing experts from these fields together with economists and central bankers is potentially very ... valuable."
"A large number of aspects of the observed behaviour of financial markets is hard to reconcile with the efficient market hypothesis... But a determinedly empirical approach -- which places a premium on inductive reasoning based on the data, rather than deductive reasoning grounded in abstract premises or assumptions -- lies at the heart of these methods ... simulations will play a helpful role."