A New Paradigm?

Fifty years ago this month, Thomas Kuhn’s The Structure of Scientific Revolutions was published, and it remains one of the more influential books of our time.  It is also one of the most cited academic books of all time. If you haven’t read it or read it recently, you might pick up a copy of the new 50th anniversary edition. 

If you have ever heard or used the term “paradigm shift” then you have been influenced by Kuhn.  Before Kuhn, our views of science were dominated by ideas about how it ought to develop (the “scientific method”) together with a sense of narrative, of science marching forward inexorably and heroically. 

Where the standard account saw steady, cumulative “progress,” Kuhn saw movement and discontinuities – a set of alternating “normal” and “revolutionary” phases in which communities of specialists in particular fields are plunged into periods of difficulty and uncertainty. These revolutionary phases (e.g., the transition from Newtonian mechanics to quantum physics) correspond to great conceptual breakthroughs which are often ignored or rejected for long periods prior to ultimate acceptance and which form the foundation for succeeding phases in which the breakthrough has become the consensus. That this version of history seems no-big-deal now demonstrates how powerful his ideas have become. 

Per Popper, “normal science” is distinguished by the fact that it focuses upon refuting rather than confirming its theories. However, and consistent with more recent discoveries of our behavioral flaws and biases, “normal” scientists in reality spend most of their time trying to confirm what they already think — their paradigm.  We shouldn’t be surprised whenever confirmation bias rears its head. 

That Kuhn deemed his book a mere “sketch” (only 172 pages) is part of its charm and its power.  It is simple, straightforward and easy to understand.  It just makes sense.

A “paradigm” as an intellectual framework that makes research possible.  It’s clear (to me at least) that the finance world needs a new paradigm.  Its model-driven alleged rationality just plain doesn’t work very well.  It doesn’t fit the data and is inconsistent with experience at nearly every level.  The best of cutting-edge financial, economic and scientific research today is data- rather than theory-driven.  Being data driven is a focus of this blog (see, e.g., here, here, here and here), as the masthead proclaims. I hope that our next financial paradigm (not to mention economic and political paradigms) is predicated not upon some overarching theory, but rather upon that which can be demonstrated to work.  That’s more than enough of an intellectual framework for me.

Thomas Kuhn deserves as much.

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A Different Kind of “New Normal”

Intuitively, most of us think of scientific advance as essentially a linear (and heroic) progression.  The idea is that science develops by the addition of new truths built upon the edifice of old truths, or the increasing approximation of theories to the truth, and in the rare and unusual case, the correction of past errors. This progress might accelerate in the hands of a particularly great scientist, but the ongoing progress itself is thought to be all but guaranteed by the scientific method.

On the surface at least, “normal” science resembles this standard cumulative picture of scientific progress.  This view of science prevailed at least until Thomas Kuhn’s seminal work, The Structure of Scientific Revolutions, in which he demonstrated that scientific change is not always as straightforward as we tend to think.  Indeed, the development of science has not been remotely uniform but has seen alternating “normal” and “revolutionary” phases. These revolutionary periods are not merely periods of accelerated progress; they differ qualitatively from normal science.

Kuhn describes normal science as “puzzle-solving,” which suggests success with adequate ability and effort and a “known-ness” to the project and the objective.  A puzzle-solver is not entering uncharted territory. Revolutionary science, however, is not cumulative in that, according to Kuhn, scientific revolutions involve an overthrow of existing scientific belief and practice – a paradigm shift.  Not all the “achievements” of the preceding periods of normal science are retained in a revolution.  The shift from Newtonian physics to Einstein’s theory of relativity is a classic example.

Kuhn argued that during periods of normal science, scientists neither test nor seek to confirm their guiding theories and principles – anomalies are ignored or explained away to the extent possible.  Confirmation bias exists there too.  Only the accumulation of ongoing and particularly troubling anomalies (those that undermine the practice of normal science) can lead to a crisis and the potential for revolution.  Such times are particularly open to competition among differing ideas and rational disagreement about their relative merits.  That said, any proposed replacement paradigm clearly needs to solve the majority of those anomalies or it would not be worth adopting in place of the existing paradigm.

The net result is that mature sciences experience alternating phases of normal science and revolution. In normal science the key theories, instruments, values and metaphysical assumptions that comprise it are kept fixed, permitting a cumulative generation of puzzle-solutions.  However, in a scientific revolution the paradigm undergoes revision in order to permit the solution of the anomalous puzzles that disturbed the preceding period of normal science. 

On the other hand, immature science, in what Kuhn sometimes calls a “pre-paradigm” period, lacks any overarching consensus.  Competing schools of thought develop and use different procedures, theories, and even metaphysical presuppositions. Consequently there is little opportunity for collective progress. Even localized progress by a particular school is made difficult because so much intellectual energy is poured into disputes over the fundamentals with other schools instead of developing a methodological and research tradition.

Kuhn was careful to apply his ideas only to the hard sciences.  However, it isn’t hard to see their potential applicability elsewhere.  To the extent that economics and market analysis can be seen as a hard science (itself a significant leap), they are surely immature in that there is so little consensus.  But the major themes are fairly clear.  In economics, Say’s Law gave way to Keynesianism which was largely overcome by monetarism, although the recent financial crisis has led more than a few to suggest that the reports of the death of Keynesianism are premature. In investment, the competing would-be paradigms are numerous, contradictory and largely unsatisfactory, especially during this secular bear market.

Depending upon your personal perspective, potential crises involve (a) market and investment theory, especially in a secular bear market; (b) economic theory; (c) political theory; and even (d) the viability of democratic capitalism.  These all have enormous consequences for investors and the choices they make.  We could all postulate at least several more (and more specific) candidates.

To those who say their view of the world has prevailed (whether indexers, Democrats, Keynesians or the purveyors of any other dogma) – let me remind you that facts are messy things and often get in the way of one’s favored preconceived notions.  I don’t pretend to know when (or even if) the next paradigm shift in our industry takes place.  But here’s to progress nonetheless, normal and revolutionary alike.