Why Economic Theory is Out of Whack

Last week the New Scientist had an article that looked at an alternative economic theories to better explain the current credit crisis and other economic bubbles.  The traditional economic theory developed in the 1950s by Milton Friedman and Eugene Fama says that prices of a stock or commodity should tend towards their true values based on the incentives to investors to make money and market information. This theory tends to explain relatively small movements in the value of the asset, but doesn’t explain large movements in price up or down very well.

The article can be found here (subscription required). I’ve located the complete article here - until the New Scientist’s lawyers find the site and take it down.

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One Comment

  1. Mike:

    This is exactly why the work of people like those at “Freakonomics” is so valuable.

    There are reasons that these things happen. They just aren’t always as obvious as we think.

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