Economics has rightly taken pride in the level of technical sophistication it has been able to bring to bear on social scientific research over the past one hundred years. Robert Shiller, in a recent interview with Nigel Warburton over at Social Science Space, is not the first to underline that this specialisation has come at the cost of disciplinary myopia. But he brings those drawbacks incisively to the point: where financial economists could have relied on their judgment and perception of ongoing developments relating to the wider implications of securitization and ever more sophisticated levels of financial engineering, they revelled in the arcana of options pricing models and arbitrage theory. Where circumstancial evidence might have pointed them to all the hall marks of a market bubble, they remained immersed in more ‘scientific’ form of empirical research that has the unfortunate drawback of being retrospective.
Retrospective empirical research, so Shiller, has led to a curious kind of scientific progress in economics. An economic intuition, drawn from past phenomena, furnishes the material for a novel economic concept, model or theory. Names are made, prizes one. Alas, the original phenomenon then curiously disappears, maybe even because it has been cast into a model that has diffused into the world of practitioners and informed their practice. We are reminded of Maynard Keynes’s ‘beauty contest’ metaphor of financial markets, where the winning strategy involves guessing what the perception of other market participants is. Sociological insights such as Merton’s work on self-fulfilling prophecies are foundational to the modern understanding of banks and financial bubbles. Here, even behavioral economics has still some way to go. Often described as a psychological turn in late 20th century economics, it’s true promsie lies in a more broadly oriented interdisciplinary widening of social scientific horizons. Neuroscientific insights into decision making are just one such opportunity for gains from transdisciplinary trade.
An Introduction to Behavioral Economics 2nd ed. 