Fund managers cannot possibly know what the future will bring, yet they have to commit today to holding assets that promise a return tomorrow. Such a commitment requires confidence -- confidence that is hard to find in the face of uncertainty. To cope with the uncertainty, fund managers rely on gut feelings and invent stories that justify their decisions. In the end, it is stories and emotions that drive financial markets. That is, in a nutshell, the theory of asset pricing developed by David Tuckett.
Some unconventional advice to monetary policy follows. Central banks, Tuckett says in this interview with INET Executive Director Robert Johnson, should create stories themselves. This is not to call for central bankers to tell fairy tales. No, what central banks can do is create their own stories -- stories that are anchored in meticulous observation and forensic analysis of new markets and new business opportunities.
David Tuckett, trained in economics, medical sociology, and psychoanalysis, works part time in clinical practice. Since winning a 2006 Leverhulme Research fellowship for a "psychoanalytic study of investment markets," he has been collaborating with Professor Richard Taffler to introduce psychoanalytical understanding to behavior in financial markets.
Part 2: What Bubbles Are Made Of
Part 3: Not Just the Numbers: The Psychology of Emotional Asset Management
Part 4: The Way Down: When Bubbles Pop
Part 5: After the Crash: The Need for New Economic Thinking
Part 6: The Human Element: Reinserting People into Finance