Ainslie challenges our interpretation of the properties of hyperbolic discount curves in an iterated prisoners’ dilemma model. In this reply, we discuss the emergence of hyperbolic discount functions in the behavioral economics literature and evaluate their properties. Furthermore, we present a summarized version of our IPD model and evaluate Ainslie’s points of contention.

This article argues that the field of asset pricing theory is undergoing a scientific revolution in Kuhnian terms. The orthodox view is one of determinate change in causal processes and inherent stability whereby financial markets, left unfettered, allocate nearly perfectly society's scare capital. However, decades of mounting anomalous evidence against the implications of stable causal processes perpetuated by conventional models based on efficient markets and the rational expectations hypothesis have paved the way for alternative avenues of research. Although various approaches (...) are being developed, the imperfect knowledge economics class of models has emerged as a potential new paradigm in the field of macro-finance. By stopping short of fixing in advance the specification of individual forecasting behavior and the causal process, the IKE class of models has been able to reconcile many of the puzzles found within the literature on asset price behavior and risk. (shrink)

Policy makers and economists alike failed to predict the financial crisis of 2008. Their failure is due not only to the difficulties in predicting events in a complex world, but to the self-referential character of modern macroeconomics. Instead of seeking new empirical insights about economic behavior, macroeconomists have become creators of computer games—content to develop models that are internally consistent but have no necessary connection to the real world. Economic modeling aspires to be scientific in its deductive consistency and rigor. (...) However, even the natural sciences require a good dose of induction, which, in turn, entails varying one's method of study based on the phenomenon one is studying. (shrink)

(2013). Beyond mechanical markets – asset price swings, risk and the role of the state. Journal of Economic Methodology: Vol. 20, Methodology, Systemic Risk, and the Economics Profession, pp. 69-75. doi: 10.1080/1350178X.2013.774856.

This note focuses on George Soros's challenge to macroeconomics and finance theory that any valid methodology of social science must explicitly recognize fallibility in a Knightian sense. We use a simple algebraic example to sketch how extant models formalize fallibility. We argue that contemporary theory's epistemological and empirical difficulties can be traced to assuming away fallibility in a Knightian sense. We also discuss how imperfect knowledge economics provides a way to open mathematical models to such fallibility, while preserving economics as (...) an empirical science. (shrink)

ABSTRACT Economists not only failed to anticipate the financial crisis; they may have contributed to it—with risk and derivatives models that, through spurious precision and untested theoretical assumptions, encouraged policy makers and market participants to see more stability and risk sharing than was actually present. Moreover, once the crisis occurred, it was met with incomprehension by most economists because of models that, on the one hand, downplay the possibility that economic actors may exhibit highly interactive behavior; and, on the other, (...) assume that any homogeneity will involve economic actors sharing the economist’s own putatively correct model of the economy, so that error can stem only from an exogenous shock. The financial crisis presents both an ethical and an intellectual challenge to economics, and an opportunity to reform its study by grounding it more solidly in reality. (shrink)

Hayek argued that the central question of economics is the coordination problem: How does the spontaneous interaction of many purposeful individuals, each having dispersed bits of subjective knowledge, generate an order in which the actors' subjective data are coordinated in a way that enables them to dovetail their plans and activities successfully? In attempting to solve this problem, Hayek outlined an approach to economic theorizing that takes seriously the limited, subjective nature of human knowledge. Despite purporting to have appropriated Hayek's (...) thought by acknowledging the information-transmitting role of prices, mainstream economists have missed Hayek's point. The predominant tool of formal economics—equilibrium analysis—begins by assuming the data held by actors to have been pre-reconciled, and so evades the problem to be solved. Even the more advanced tools for modeling knowledge in economic analysis, such as the economics of information, assume away either the subjectivism of knowledge and expectations (rendering the coordination of beliefs and plans a trivial matter) or the frictions and “imperfections” of reality (rendering the coordination problem indeterminate). (shrink)

This research paper approaches the following question through the hypothetico-deductive model: How is it that some companies have survived the crisis while others have not? Such question is expanded on herein: How is it that a company that suffers a cyclical crisis in the broader context of a systemic crisis is able to survive? Looking into the conditions concerning the likelihood of survival in the face of a crisis, it all points to the ethical side of the issue, thus prompting (...) a complementary and final question: To what extent can an organizational culture based on strong moral foundations foster the survival of companies in times of crisis? The first part of this study, covering economic cycles, conducts a taxonomic analysis that recognizes and relates the different types of crisis –entropic vs. dialectic; structural vs. cyclical; system vs. company crisis– and provides an account of some of the reasons that the literature on the subject uses with the aim of explaining the current crisis. The second part will cover a classification as well as a systematic description of the reasons and causes of the cyclical crises, so as to be able to identify the human factor, which is not only the most common root-cause of organizational crises but also the key to overcoming them. The third part focuses on the ethical aspects of the matter at hand, and proposes some hypotheses covering the strategic conditions and cultural requirements that would be more likely to foster company survival in environments as hostile as the one we face nowadays. The article ends by offering a series of practical proposals that, in the authors’ view, may be a useful guide for companies to strengthen their defense mechanisms when faced with prospective crises and recessions. Finally, some potential lines of research for future projects are suggested. In employing various tools such as quantitative, qualitative and mixed methods, we sought to conduct an empiric verification of whether the hypotheses that were part of this qualitative analysis were consistent. (shrink)