Scientific American says the quant revolution in finance bears part of the blame for the crisis and it’s time for new and better models of the way the world really works (via Mark Thoma).

These lapsed physicists and mathematical virtuosos were the ones who both invented these oblique securities and created software models that supposedly measured the risk a firm would incur by holding them… Without the formal requirement to maintain debt ceilings and capital reserves, the commission had freed these firms to police themselves using risk tools crafted by cadres of quants … For its part, the quant community needs to undertake a search for better models—perhaps seeking help from behavioral economics, which studies irrationality of investors’ decision making… These number wizards and their superiors need to study lessons that were never learned during previous market smashups involving intricate financial engineering…

Maybe. Adding behavioral assumptions is a nice tweak, but it won’t remedy the fundamental flaw of this kind of approach. The number wizards need to do much more than read and quantify history. The problem is that that quants and much of modern economics for that matter have neglected the systematic study of economic transformation. What’s needed goes far beyond more historical and behavioral data points. Concretely this would mean building on the fundamental insights of Darwin, Marx, Schumpeter, and Jacobs to create a real scientific understanding of how economies grow, evolve, generate crises, and restore themselves. There are very, very few economists or social scientists that are willing to take on these big questions. And to build these models will not only take big thinkers, but reasonably large and stable teams of theorists, economic and financial historians, computer scientists, data-base experts, and others. It’s what we’re trying to do here at the Prosperity Institute, and I’d encourage others to join in.