Chicago school of Economics
New Yorker blogger John Cassidy interviewed eight Chicago economists and talked about the efficient market hypothesis and the rational expectation models in light of the financial crisis. Very fun reads.
In particular, the following conversations are very interesting:
Cassidy: I spoke to Cochrane. He said the problem with behavioral economics is it is too flexible—you can use it to explain anything. He also pointed out that Robert Shiller has been calling for economics to incorporate psychological insights for thirty years, but little progress has been made.
[In answering this question, Thaler brought up the Internet stock bubble, during which shares in Palm, the handheld computing companies, were worth more than the entire market capitalization of Palm’s parent company, 3Com.]
Thaler: [Cochrane] has a model explaining why, during the Internet bubble, the prices of Palm and 3Com were rational. Rational models are one hundred per cent flexible. If you allow time-varying discount rates, there is no discipline whatsoever. If you look at what happened to tech stocks and then to real estate, and you say maybe there wasn’t a bubble—where is the discipline in that?
I think it’s fair to say that behavioral economics hasn’t solved everything. That is true. But to say Shiller and I have been doing it for thirty years—there was just me and him. Now we have some young recruits. We are not outmanned a thousand to one. But there is work to do.
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