Herding in the economics profession?

09Jan12

Do economists, as a professional community, behave like sheep -all following the sheepdog? Or like fish, moving altogether in schools?

However bizarre these analogies might seem at first sight, they have been applied successfully to finance, where the concept of “herding behaviour” denotes cases in which a majority of traders adopt a shared, or very similar, pathway. It induces lower diversification of portfolios, thereby generating systemic risk (put differently, all people put all their eggs in the same basket, which is a bad choice if it turns out that it was the wrong basket).

The question, then, is whether something similar is going on among economists too. Herding behaviour may result from the institutional structure and incentives, which may make it a suitable strategy for an individual to always swim with the current; yet risk may arise from limiting the insurance function that diversity of research could play, especially in connection with policy recommendations. In this sense, the scholarly community of economists may come to resemble the financial community (and sheep and fish communities too, for that matter).

I discussed this question last Friday at a thought-provoking session at the annual ASSA meetings (the single most importance economics conference in the world!) in Chicago. The idea is from an INET-funded project led by John Davis and Wade Hands, and co-sponsored by the Journal of Economic Methodology which will devote a special issue to it. It follows a two-day workshop on the topic we had last month at Duke University. The other panelists were two distinguished contributors to the reflection on and around the discipline, notably David Colander and Mark Thoma.

Wade and John started outlining their original idea -an interesting part of which is the idea of doing the “economics of economics”, or the study of economists as we study any other economic agents. David insisted on a skewed structure of incentives, which has institutional origins and may lead the profession astray; and recommended, as he has often done recently, a humbler view in which economists would see themselves not as “scientists” in search of big truths, but as “engineers” in charge of sorting out practical problems. Mark exposed the risks due to excessive insularity of the discipline and stressed the important role of blogs (he is a most effective blogger himself!) as bridges between the ivory tower of professional economists and the wider public.

My specific contribution was on the “lifecycle” of the economics community, with a constant flow of leavers (those who retire or more extremely, die) and joiners (new PhD economists going on the market). Does turnover contribute to renewal in the discipline -”funeral by funeral”, as Paul Samuelson famously said? Starting from an initial consensus around the key foundations taught in graduate schools, does a regular flow of newcomers bring in some degree of change or diversification? (I can tell for now that results are mixed and point toward something I would call “cautious change” -but I’ll write more on the topic in the next few months).

Overall, the notion of herding itself seemed more complex and perhaps, even more challenging than we initially thought -but still, an extremely fertile subject of discussion that stimulated insightful comments from the audience. More will come in the next months…

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