Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/37030
Authors: 
Pope, Robin
Selten, Reinhard
Kube, Sebastian
von Hagen, Jürgen
Year of Publication: 
2009
Series/Report no.: 
Bonn econ discussion papers 2009,18
Abstract: 
The prior paper in this sequel, Pope (2009) introduced the concept of a nominalist heuristic, defined as a focus on prominent numbers, indices or ratios. In this paper the concept is used to show three things in how scientists and practitioners analyse and evaluate to decide (conclude). First, in constructing theories such as purchasing power and interest parity to predict exchange rates and to advocate floating exchange rates, economists unwittingly employ nominalist heuristics. Second, nominalist heuristics have influenced actual exchange rates through the centuries, and this finding is replicated in the laboratory. Third, nominalist heuristics are incompatible with expected utility theory which excludes the evaluation stage, and are also incompatible with prospect theory which assumes that, while the evaluation stage can involve systematic mistakes, the overall decision situation is ultra simple. It is so simple that: a) economists and psychologists can mechanically model and identify what is a mistake, and b) decision makers can maximise. However, contrary to prospect theory, in the typical complex situation, neither a) nor b) holds. Assuming that a) and b) hold has resulted in the 1988 crisis from applying the Black Scholes formulae to forward exchange rates and contributed to sequel financial crises including that of 2007-2009. What is required is a fundamentally different class of models that allow for the progressive anticipated changes in knowledge ahead faced under risk and uncertainty, namely models under the umbrella of SKAT, the Stages of Knowledge Ahead Theory. The paper's findings support a single world currency rather than variable unpredictable exchange rates subjected to the vagaries of how prominent numbers, ratios and indices influence events via the models of scientists and practitioners.
Subjects: 
nominalism
money illusion
heuristic
unpredictability
experiment
SKAT the Stages of Knowledge Ahead Theory
prominent numbers
prominent indices
prominent ratios
transparent policy
nominal equality
historical benchmarks
complexity
decision costs
evaluation
maximisation
Black Scholes
Lehmann Brothers
sub-prime crisis
central bank swaps
JEL: 
D800
D810
F310
F330
Document Type: 
Working Paper

Files in This Item:
File
Size
765.87 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.