The Methodology of Systematic Risk

This research project explores the factors producing “herding” in the economics profession and professional investment community with the goal of articulating policy changes appropriate to the organization of the economics profession and its practices in particular.

Post-crisis criticism of the economics profession claims that the incentives for research and the organization of academic economics encourage “herding” behavior and discourage diversification in economic theory and modeling. The implication is that changing the incentives for economic research could increase the range of thinking in the profession and reduce professional blindness to economic change. A similar sort of criticism has been advanced with respect to the institutionalization of the investment community, where incentives also encourage “herding,” leading to highly correlated patterns of investment across different asset classes, increasing the fragility of the financial system. The implication is that changing the incentives institutional investors face might reduce the financial system’s vulnerability to crisis. Explaining in specifically methodological terms the social-institutional processes which affect decision-making and behavior and cause the propensity for herding is a step toward producing institutional change and influencing how macroeconomic modeling and investment choices occur.