Feasibility and Realism in Cognitive Economics

Abstract

Economics is not in good shape. Over the past 20 years even The Economist has debated the case for abandoning the traditional neoclassical economic tools, since they seem unable to explain, let alone predict, most economic phenomena. In an article published on 23 April 1994, The Economist affirmed that, according to financial economists, only the study of decision-making psychology could shed any light on what is apparently irrational and inexplicable financial market behaviour. The neoclassical economists believed that markets are efficient, in other words prices reflect fundamental information and they change only if that information changes, rather than in response to the whims of fickle investors. Quoting George Soros (Wall Street guru as well as Popper's student) and the Stanford economist Bill Sharpe, who won the Nobel Prize for his part in developing efficient-market theory, The Economist maintained that prospect theory and framing effects offer better explanations than neoclassical economics for both short- and long-term oddities in financial markets.