Science reinvents the economy: Predicting the big one

According to classical models of economics, financial crises don't happen. People, firms and other economic "agents" act rationally, in their own self-interest and with profound insight. They would never be duped into investing in a market that was enormously inflated and about to crash. The result is a stable, self-correcting equilibrium. Prices too high? People stop investing. Too low? People start buying again.

Clearly, then, there is a lot wrong with classical economics. "Most economic analysis still takes place within a totally inadequate set of concepts," says Jean-Phillippe Bouchaud, physicist and co-founder of the hedge fund Capital Fund Management in Paris, France. "Theories of finance can learn a lot by connections to the rest of science."