ssrn-id1757735 - Anomalies in Economics and Finance...

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Electronic copy available at: Anomalies in Economics and Finance Christopher L. Gilbert Initial draft: 4 June 2008 This revision: 2 March 2011 Abstract The term “anomaly” played a crucial role in Thomas Kuhn’s characterization of scientific progress. For Kuhn, an anomaly is a puzzle which challenges an accepted paradigm. Puzzles only achieve anomalous status once an alternative paradigm becomes available which allows explanation of the puzzle. Anomalies were introduced into the finance literature by Michael Jensen but more as resolvable puzzles than Kuhnian anomalies. They entered economics via Richard Thaler who saw behavioural economics as the alternative to the neoclassical paradigm. Both authors use the term anomaly in a deliberately Kuhnian manner. Kuhn formulated his ideas by looking back across the history of physics. By contrast, behavioural economists use Kuhn’s concepts in a forward-looking manner as a marketing tool for their ideas. Keywords: anomaly, behavioural, effects. JEL classification: B23, B41 Department of Economics, University of Trento, Italy; email: [email protected] This is a revised version of a paper prepared for the 2010 HOPE Conference, Durham (NC), 23- 26 April 2010. The initial version of this paper was prepared for the workshop “What is behavioural in behavioural economics?” Trento, Italy, 5-6 June 2008. I am grateful to Stephania Bortolotti, Francesco Guala, Kevin Hoover, Michael Jensen, Tom Stapleford, Chris Tyson and participants at the 2008 Trento workshop and the 2010 HOPE conference for comments and suggestions. All errors remain my own.
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Electronic copy available at: 1 1. Introduction Anomalies are events, observations or results that are apparently incompatible with a received scientific theory. They assumed a pivotal role in the philosophy of science as the result of the influence of Kuhn’s (1962, 1970a) discussion of scientific method. In this paper, I offer a Kuhnian account of the history of anomalies in economics and finance. Kuhn saw normal science as a puzzle-solving activity. Puzzles are phenomena which are discrepant with the received paradigm but which the scientific community believes can be resolved by extending paradigmatic exemplars. Persistent failure to resolve a puzzle, together with the availability of an alternative paradigm which offers the prospect of resolution, transforms the puzzle into an anomaly. Anomaly recognition is thus a component of paradigm shift. The discussion of anomalies was introduced into finance by Michael Jensen in 1978 and into economics by Richard Thaler in 1987. In both cases, the use of term anomaly is explicitly Kuhnian. Nevertheless, Jensen uses the term to imply what Kuhn intended by puzzle while Thaler’s usage is more Popperian than Kuhnian. The important paradigm shift over the past three decades in economics and finance has been the movement to behavioural economics and finance through the incorporation of insights, methodologies and results from cognitive psychology. I
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ssrn-id1757735 - Anomalies in Economics and Finance...

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