Policy makers and economists alike failed to predict the financial crisis of 2008. Their failure is due not only to the difficulties in predicting events in a complex world, but to the self-referential character of modern macroeconomics. Instead of seeking new empirical insights about economic behavior, macroeconomists have become creators of computer games—content to develop models that are internally consistent but have no necessary connection to the real world. Economic modeling aspires to be scientific in its deductive consistency and rigor. (...) However, even the natural sciences require a good dose of induction, which, in turn, entails varying one's method of study based on the phenomenon one is studying. (shrink)

Policy makers and economists alike failed to predict the financial crisis of 2008. Their failure is due not only to the difficulties in predicting events in a complex world, but to the self-referential character of modern macroeconomics. Instead of seeking new empirical insights about economic behavior, macroeconomists have become creators of computer games—content to develop models that are internally consistent but have no necessary connection to the real world. Economic modeling aspires to be scientific in its deductive consistency and rigor. (...) However, even the natural sciences require a good dose of induction, which, in turn, entails varying one's method of study based on the phenomenon one is studying. (shrink)

Johnson, Bilovich, and Tuckett set out a helpful framework for thinking about how humans make decisions under radical uncertainty and contrast this with classical decision theory. We show that classical theories assume so little about psychology that they are not necessarily in conflict with this approach, broadening its appeal.