And, lately, scholarly work has been attributing a new, enhanced role to psychological elements and the recognition that there are limits to what one can know. In the field of the so-called behavioural finance this may even go as far as to validate “irrational” actions.
And eminent economists argue that these elements play a role in explaining both conservative attitudes and speculative bubbles.11 The potential limitations of quantitative analysis are therefore not restricted to macroeconomics, econometric modelling and forecasting but also apply to finance. And they may have dire consequences. The case of the CDOs is instructive.