Recent Advances in Neo-Schumpeterian Economics
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Recent Advances in Neo-Schumpeterian Economics

Essays in Honour of Horst Hanusch

Edited by Andreas Pyka, Uwe Cantner, Alfred Greiner and Thomas Kuhn

This judicious selection of recent essays demonstrates the applicability of the fundamental principles of neo-Schumpeterian economics, namely, innovation and uncertainty. The authors demonstrate how neo-Schumpeterian economics is developing into a comprehensive economic theory encompassing industry, the public sector and financial markets.
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Chapter 6: Bubbles, Crashes and the Psycho-Economic Forces Behind Them

Friedrich Kugler


121 the case. Bubbles and crashes are viewed as psychological overactions of individuals, groups and crowds in the marketplace. In consequence, people turn away from normal investment behaviour. Therefore speculative markets should be an excellent laboratory for social scientists to study such deviations from behavioural norms. However, particularly in financial modelling, these behavioural aspects are considered rather inadequately. Research works in behavioural finance mainly point out that decision making is influenced more by heuristic methods (Peters, 2003). Also, evolutionary economics models are marked by a renunciation of the strict rationality postulate (for an example see Grebel et al., 2004). All of these perspectives are more or less contradictory to the neoclassical view, which models the decision-making process of a rational individual strictly with the expected utility theory. Economists are interested in market behaviour and/or results, as well as in the psychology of the individual decision making and the interactions in progress. For this purpose, I suggest in this chapter a microfoundation of a stock market model. However, instead of the usual approach, in which modelling is carried out from the micro to the macro level, the opposite approach is pursued. Starting with the existence of bubbles and crashes at the macro level and the assumption that these phenomena are controlled by a non-linear dynamic, I shall explain the forces behind them. This may provide some insight behind the scenes of market results and the underlying interaction of the psycho-economic factors at the micro–macro level. The chapter is structured as...

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