When the current financial crisis hit, the failure of traditional economic doctrines to provide any sort of early warning shocked not only financial experts worldwide, but also governments and the general public, and we all began to question the effectiveness and validity of those doctrines.
A research team based in Israel decided to investigate what went awry, searching for order in an apparently random system. They report their findings in the American Institute of Physics’ journal AIP Advances.
“To a non-economist, economic theories seem decoupled from human reality. The fundamental assumption is that investments are made rationally. But investors can behave irrationally—driven largely by greed and fear, and other human factors,” explains Ben-Jacob. “It’s also odd that many mathematical analyses, such as the design of investment portfolios, assume no memory. It’s assumed that stock prices behave with no apparent temporal order. Yet investors, including professional traders, take into account past behavior and are particularly influenced by the variation in prices or the volatility associated with the fear index.”