Friday, June 12, 2009

Complexity in financial markets -need and limitation of models

“We have indeed in many fields learnt enough to know that we cannot know all that we would have to know for a full explanation of the phenomenon”.
F. A. Hayek

Hayek's comment is a useful focus on our limitations to understand financial market. We fight the dark forces of time and ignorance that drive financial markets as we march through this crisis. We do not know how markets will behave in the extreme or what will be the react of policy-makers Keynes was the first to describe the problem of time and ignorance. Economic decisions are based on the future (time), bu the future cannot be known with precision, so we face ignorance.

Our models and stories are just a short-hand of what we think we know and not what may actually be occurring. However, models serve as a useful framework for determining what can be tested and knowable.

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