The Collapse of the Model World: From Faith in Equations to Unsustainable Asset Bubbles

Abstract

The meltdown in financial prices in 2007 and 2008 prompts the question of why the previous peak prices were ever regarded as reasonable. Prevailing pricing dynamics were in part produced by the influence of economists’ valuation models, which supposedly gave insights into the one true price that would emerge under conditions of market self-regulation. The valuation models thus helped traders to justify paying higher prices for all sorts of esoteric derivatives instruments, but not because their inputs produced an accurate representation of the relationship between historical price data and verifiable patterns of real-world economic socialisation. They were readily accepted despite being devoid of genuine economic content because they provided a means of visualising an ever more complete financial market structure built purely on demand-and-supply dynamics.