The (lack of an) uncertainty principle in economics

Nature News : The reasons for the current financial crisis have been picked over endlessly, but one widespread view is that it involved failures in risk management. Facing up to these failures could prompt the bleak conclusion that trying to anticipate the economic future is an impossible task. That’s the position taken by Nassim Nicholas Taleb in his influential book The Black Swan, which argues that big disruptions in the economy can never be foreseen, and are much more common than is evident from conventional theory.How should those still working in financial markets absorb this pessimistic message? In a preprint on arXiv , Andrew Lo and Mark Mueller of the Sloan School of Management at MIT, in Cambridge, suggest that what economists grappling with uncertainty need is a proper taxonomy of risk. In this way, they state, risk assessment in economics can be united with the way uncertainties are handled in the natural sciences. It may then become clearer where conventional economic theory is a reliable guide to planning and forecasting, and where its predictive value fails.