Parker College of Business professor proposes new way of thinking about stock market uncertainty
Associate Professor of Finance Nicholas Mangee, Ph.D., is exploring a new approach to dealing with radical or “Knightian” uncertainty in the stock market called the Novelty-Narrative Hypotheses (NHH).
“Historically, novel events cause the processes driving stock market returns to change in unforeseeable ways,” says Mangee. “This kind of instability famously eludes representation in terms of standard probability theory, which relies on past data. To deal with so-called ‘radical’ or ‘Knightian’ uncertainty, market participants rely on narrative dynamics to help give shape and contextual meaning to novel events as relationships change in real-time.”
According to Mangee, NNH enables researchers, policymakers and investors alike to better understand stock market outcomes and confront unforeseeable change and the Knightian uncertainty it engenders with real-world observations and scientific scrutiny. Standard economics relies on probabilistic rules that presume that the future is an exact replica of the past and, as such, is unable to deal with “true” uncertainty, he said. NNH offers a way forward.
The Parker College of Business faculty member published his new research in a book titled How Novelty and Narratives Drive the Stock Market: Black Swans, Animal Spirits and Scapegoats, which has been endorsed by Nobel Laureate George Akerlof, among others.
Posted in Applaud