Financial Engineering Meets Cognitive Design
Monday, September 14th, 2009Many have argued that one of the root causes to the recent rout in the global capital markets was overtly simplistic risk models. Making them more accurate may require factoring in cognition. As pointed out in the New York Times:
“That failure suggests new frontiers for financial engineering and risk management, including trying to model the mechanics of panic and the patterns of human behavior.”
This means our new quantitative models of the capital markets will need to take into account how the minds of investors and consumers actually work. It may be possible to apply core ideas from cognitive design such as, people make decisions and behave to maximize their mental energy, to the development of a 21st century approach to the capital markets.
