Wednesday, July 28, 2010

Grantham on "The Greatest-Ever Failure of Economic Theory"

From Jeremy Grantham's essay Finance Goes Rogue:

"I have not been a great fan of the theory of rational expectations – the belief in cold, rational, calculating homo sapiens; indeed, I believe it to be the greatest-ever failure of economic theory, which goes a long way toward explaining how completely useless economists were at warning us of the approaching crisis (with a half handful of honorable exceptions). But it would be a better world if their false assumptions were actually accurate ones: if only information flowed freely, were processed efficiently, and were available equally on both sides of every transaction, we would indeed live in a more efficient and probably better world."

System design should be based upon what occurs in the real world instead of an imaginary one with flawed assumptions of how market participants actually tend to behave.

Adam

Related posts:
-Friends & Romans
-Superinvestors: Galileo vs The Flat Earth
-Max Planck: Resistance of the Human Mind

Related article:
-Finance Goes Rogue
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