Scientific Theories and the Efficient Market

Like David, I thought the theoretical core of Myth was the material on Thomas Kuhn's The Structure of Scientific Revolutions.  Although Myth is an intellectual history of a theory, it really cares about the people who devised the theory, and it spends a lot of time on how they -- as individuals -- shaped its various permutations.  It is careful in its history/sociology; it explains the importance of a particular journal to the field, for instance, and how it acquired that reputation.  Now, however, the theory is in crisis.  And the obvious question is: what next?

It's unfair to demand that an author to tell us more about the future at the end of a history.  After all, that is Myth's criticism of  the efficient capital markets hypothesis (ECMH), in a sense -- you can't depend on the past to predict the future, especially when you're predicting human behavior.  I think the book's assessment of the present is very fair: it shows an uneasy uncertainty, with both "sides" in the debate conceding ground to the other.  But it leaves open the question that remains on everyone's mind: where do we go from here?

I'd like to ask a related but more specific question: how do we go from here?  Do we use the methodologies that developed ECMH to try to figure out what went wrong and move from there?  Or do we take an entirely new approach?  I would be interested in Justin's take on the high-level mathematical theory that drove ECMH and its offshoots.  Do we go back to the mathematical drawing board?  Or do we now turn to empirical social psychology?  Or neuroscience?  Or moral philosophy?  Or some mish-mash of everything?

I think part of what Myth is saying is that we have to be more ecumenical, more open to insights from outside the academic mainstream.  Fox's harshest criticism in the Afterword is for the "mindless conformism" that led economists to assume the ECMH was the only answer.  But academia is driven by methodology, and by differentiating between "good" methodologies and "bad."  Can economic theory as taught in grad schools today take us to the new answers?  Or do economists need to look outside, like Thaler did with Kahneman and Tversky, to find a new approach for the future?

I guess, if I were to frame this in analogies, I'd ask Justin whether he thinks the modern financial theory is more like the theory of evolution, Newtonian physics, or the Ptolemaic universe.  Evolution is still regarded as the scientific consensus, but it initially spawned political outgrowths (e.g., eugenics) that mistakenly carried the ramifications of the theory too far.  In contrast, much of Newtonian physics still applies, but the theory of relativity has debunked some of its further outreaches and, in so doing, changed some of our basic assumptions about how the world works.  And the Ptolemaic universe is now viewed as a crude and simplistic approach that was, perhaps, the best guess at the time, but was wildly incorrect.

Based on my reading of the book, I would guess that Justin would compare ECMH with Newtonian physics.  ECMH will continue to provide the core of future research, but some of its maxims will be disproven and reworked along the way.  So we are still waiting for the "theory of relativity" to come to economics.  But this would imply that economists are the ones to reform economics, just as physicists reformed physics.  Physics is a science of natural phenomenon, while economics is all about human behavior.  Perhaps "economics" needs more non-economists to refine or even rethink some of its models.  That would seem to call on social psychologists and neuroscientists, or even sociologists, biologists, and/or computer scientists, to rework our understandings of how the mind works within the economic structure.  Can these insights be incorporated into economics as it is currently framed?  Right now, from this vantage, it is impossible to imagine economics without mathematical models.  Can we have models without oversimplification?