Anyone who has read opinion pieces on the financial climate in recent times must have come across rants and raves against the ‘prevailing orthodoxy’ in finance and economics. I find this debate interesting and I try to follow it. It has a tangential connection to my professional work because, with some of collaborators, I am beginning to think about possible uses of autonomous agents for analysis of properties of financial markets.
Recently, I came across (a video of) a very nice lecture by Robert Merton in which he argued that one shouldn’t be too hasty and throw out the baby with the bathwater. He sketches one possible way in which recent events can be reconciled with standard assumptions made in asset pricing theory, etc. Now, detractors are sure to argue that Merton has a lot at stake and he is bound to draw up such defensive arguments. I am not enough of an expert to judge and not qualified to engage in the debate. However, I think the lecture is well worth a listen: http://mitworld.mit.edu/video/659.