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Incorporating Human Behavior Into Wall Street Mathematical Models
After watching the stock market struggle for the past year, financial experts from Wall Street and academia are putting more effort into bringing behavioral modeling into their complex financial calculations. "The risk models proved myopic, they say, because they were too simple-minded. They focused mainly on figures like the expected returns and the default risk of financial instruments. What they didn't sufficiently take into account was human behavior, specifically the potential for widespread panic." Analysts are looking at research from other fields to supplement the hard mathematics of risk assessment. "Financial markets, like online communities, are social networks. Researchers are looking at whether the mechanisms and models being developed to explore collective behavior on the Web can be applied to financial markets." Another avenue they're exploring is how we react to the spread of disease. Jon M. Kleinberg, a computer scientist at Cornell, said, "The hope is to take this understanding of contagion and use it as a perspective on how rapid changes of behavior can spread through complex networks at work in financial markets."
Right. In fact, modern economic theories can be viewed as an equivalent of theology in 18th century (and before) monarchies: complex enough that some people will enjoy studying it and even believe the dogmas, and thus will honestly try to enforce it (today's laissez-faire yes-men, basically, with popes such as Milton Friedmann). But of course the really powerful (billionaires, big CEOs,...) don't usually really believe the baloney (neither did some Popes or kings, btw), they just subsidize educated slaves (such as Friedmann) because it serves their interests to keep enough gullible people in the "true faith" (name your favorite short-sighted political trend here).