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Symposium 2014

Virtual Library File - Uncertainty, Conflict and Divided States: Some Psychological Foundations for Macroprudential Policy

The Challenge

We live in an uncertain financial world, in the sense that we do often know neither the probabilities with which conceivable financial events will occur, nor all the possible events that could occur ...

We live in an uncertain financial world, in the sense that we do often know neither the probabilities with which conceivable financial events will occur, nor all the possible events that could occur. Additionally, we do not even know whether our conceptional structures are appropriate for apprehending and evaluating financial events. Thus future financial outcomes are often not known in any calculable way. Nevertheless we must make financial decisions, since even no decision is a decision to maintain or existing financial strategy. Although the discipline of economics has thus far provided little guidance for decision-making under uncertainty, in practice financial market participants usually act in systematic ways.

In this paper I argue that because the decision-making context of financial markets is ontologically uncertain, it is advantageous to understand what happens within them using what I term conviction narrative theory. Evolution has provided economic agents with human social and sentient faculties, including emotional and narrative capacities. They make it possible to simulate and commit to action for futures that have not yet happened. Such abilities, which are particularly well-adapted to decision-making under uncertainty where the future is necessarily not calculable, might be expected to play a part whenever decisions are hard to reverse and/or have potentially serious consequences into the relatively distant future. That future must be imagined.

This paper cam now be downloaded with commentary at: http://www.bankofengland.co.uk/research/Pages/conferences/programme2014.aspx