Literature and the big (economic) picture, or Advice to Wall Street’s Math Wizards: Get Real, Read Lit

PoeWall_street_bullOh, what a difference a year makes. From September 2008 to September 2009, the financial world imploded: Lehman Brothers folded, Morgan Stanley hemorrhaged, and Citigroup fell flat. The tales of woe from these former titans of Wall Street have now become a genre, as captured in the New York Times’ commemorative edition: “Financial Crisis: One Year Later” (9/13/09). And still no one knows exactly what went wrong.
Yet some signs of hope are emerging. A new theme is surfacing in the recondite world of econometrics, as once-arrogant “quants” begin to realize the cost of their indifference to the “real world” of human behavior. Suddenly, economists are reaching out to psychology, securing multi-million dollar grants to combine insights from cognitive neuroscience and evolutionary biology to create new perspectives on how financial markets—and their buyers—work. But the most elusive factor they will face, and the most relevant force in the “real world” is panic.
Although researchers will doubtless devise ever-more sophisticated models to understand just went wrong, they may be better advised to read great works of fiction. Edgar Allan Poe is particularly expert in describing the psychological phenomena unleashed by fear. Poe’s works provide harrowing case studies of how otherwise lucid, decent men descend into panic and dread. And once there, they rarely emerge unscathed.
Readers and scholars of fiction are often scolded for our divorce from the “real world.” But perhaps our world—the world of careful probing among the human psyche, using language as our guide–may ultimately be more reliable than econometric modeling.

NB: A shorter version of this commentary was published in the New York Times Business section (9/20/09): BU, 7.

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