Economics: An Empirical Science Capable of Forecasting Economic Events?

Abstract

In the aftermath of the 2007–2009 financial crisis, mainstream economics was criticized for having failed to either forecast or help prevent the market crash, which resulted in large losses for investors, although markets were back to pre-crisis levels by the end of the first quarter of 2013. Some have suggested that the crash itself was the result of bad or poorly applied theory. What parts of the theory are bad? What parts were poorly applied? What parts are truly relevant to investment management? Is there better science in the making? The authors of this article address these questions.

TOPICS: Portfolio theory, risk management, portfolio management/multi-asset allocation