This is part of an interview (in June 2009) with Niall Ferguson, by Jonathan Derbyshire in The New Statesman
You emphasise the fundamental instability of financial systems and the extent to which they are subject to the vicissitudes of human behaviour. Can we detect the influence of behavioural economics on your analysis?
Yes. The importing of behavioural psychology into the economic mainstream has been one of the major benefits of the crisis. The great thing about behavioural psychology and economics is that they help us to see that there are actually pretty good reasons why human beings swing from greed to fear, and why we’re not really calculating machines or utility-maximisers. We are, in fact, rather clueless gamblers.
Is this crisis a definitive refutation of the efficient markets hypothesis, therefore?
Yes. What’s so seductive about the efficient markets hypothesis is that it applies nine years out of ten. A lot of the time it works. But when it stops working, you blow up. Much of the time it looks like you’re in the Bell Curve, and then something happens that your model tells you will happen only once in a million years, but which history tells you happens about once every 50 years.
Niall Ferguson is Laurence A Tisch Professor
of History at Harvard University and William Ziegler Professor at Harvard Business School.