In the light of a global economic crisis, with many real-world implications, perhaps this spotlight is not surprising. Professor David Tuckett, who heads the Centre for the Study of Decision-Making Uncertainty, believes economic models have historically been the product of ideology as much as empirical observation. But Tuckett has secured a $250,000 (£155,000) research grant from the Institute of New Economic Thinking to research a different kind of subjectivity at play in economics: emotions.
The dominant formal approach, he believes, by postulating omniscient agents, starts from the wrong place. “Many decision-making contexts we can observe involve uncertainty and conflicting interpretation of evidence. Economic decision-makers must interpret the world they live in. Together we have built an extraordinarily innovative economy based on vision, trial and error. We believe that’s because humans can create pictures in their minds of the future and have feelings about what they envisage. They then build a narrative in which they have conviction and act to achieve it.”
One way all this can be tested is by the analysis of economic decision narratives. Because economic agents need to be convinced of the truth of their narratives, two emotion groups – excitement about gain and anxiety about loss – can be identified, and shifts in their relationship plotted through time.”
Though Tuckett cheerfully admits that this approach is still “very outside the mainstream of economics” – albeit it has caught the interest of those at the top of the Bank of England – it has proved remarkably accurate.
This has been demonstrated in retrospective analysis, notably in relation to an analysis of the emotion groups surrounding the use of the term “liquidity” in the Reuters database from 1996 to 2010. Between 2002 and 2007, Tuckett found, anxiety expressed about the concept of liquidity markedly decreased, reflecting the cavalier attitude that culminated in the crash of August 2007, which manifested first as a crisis of liquidity.
But applying his technique to forecasting – that very human trait of looking into the future – Tuckett’s “emotional shift” analysis has proven able to predict the rate of GDP between one and two quarters ahead. As accurate GDP statistics are often not available for 12 months or more this is much better, he says, than any current model.