There is an interesting book out by Nassim Nicholas Taleb called Fooled by Randomness, 2005, Random House (!!?), 2005, ISBN 0-8129-7521-9. To get right to the point, Taleb has combined cognitive science and statistics with finance.
There is nothing new about cognitive scientists using statistics. But there is something distinctly recent, at least, about finance people thinking about how cognitive science and statistics might be applied to how we approach investment thinking. I don’t mean the cookbook use of cognitive science in investments, rather, I mean how we think about investment risk. The theme of Taleb’s book is concerned with how we think about randomness.
The reader can form her/his own opinion about Taleb’s ideas. Speaking for myself, I am intrigued with his thesis that many “experts” in economics and investments are largely deluded when it comes to perceiving risk. Taleb suggests that validation of forecasting methods and the use of error estimation is generally lacking in investment trading. The cognitive connection applies to how investment traders think. Taleb suggests that there is a general lack of probabilisitic thinking.
Coming to grips with infrequent and unexpected outcomes (black swans) is one of the most befuddling and confusing challenges we all face. Our primate brains form elementary strategies for dealing with certain risks. We catch a glimse of a big carnivore in the brush and we run.
But what to do if we have a bundle of money in the market and some social or economic perturbation comes along? What will the market do if the Molybdenum prices skyrocket or if China invades Taiwan? Individuals and industries are concerned with the value of their investments over the course of positive and negative events. Stock traders need to act on clues so as to protect the value of their accounts.
Taleb laments the lack of probabilistic thinking in the investment community. He suggests that individuals and firms who are deemed as highly successful in investments are in reality just very lucky more frequently than we realize.
Even for hacks such as myself who gasped and sputtered through a few semesters of exposure to probabilistic concepts, i.e., quantum mechanics, radiation science, etc., sweeping the mind free of deterministic biases requires constant attention. How is some MBA derivatives specialist going to temper her/his enthusiasm to buy or sell when phantom patterns appear in the market? Good question.
Lamentations on Chemistry 
Gaussling: wonderful link.
But, my impression is that the idea is much bigger than just economics. Rather, the idea is that there is much more randomness in the universe than we perceive, because it is our nature to seek order in disorder.
Does this not have rather important implications for theories in our own field? How many reactions are there that we think we know how they happen because by chance the yield the product we expected, but by an entirely different mechanism than we ever dreamed of.
Of course, the field of medicine comes to mind here, also. Where we have far less experimental evidence and much more conjecture (my uninformed impression…).
Any way – thanks for the introduction.
Negative feedback individual stupidity is a tiny damped wave. The danger is organized synchronous mass stupidity with deferred feedback. When the true magnitude of the NINJA mortgage scandal becomes Official Truth (at least three layers of impossible mortgages serving as security for impossible bonds financing more impossible mortgages), leveraged and derivative US finance will implode. The Dow will tank 3000 points or more at autotrading robotic speed.
Not to worry! Food and fuel costs are not part of US inflation indexing. A $5 potato or an $9 gallon of gasoline will not Officially degrade your purchasing power.