Behavioral finance FAQ / Glossary (Paradigm)

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common convention,
percolation, representation,

Scientific Credo?

A kind of commonly accepted explanation

Sharing the belief.

A paradigm is a largely accepted fundamental theory / model,
common convention or representation.

It is seen as a consistent explanation and representation
(see representation) of an important category of phenomena in
a key branch of knowledge or activity
(in extreme cases an
interpretation of the whole Universe).
It is used as a way to deal with those phenomena.

A paradigm is more elaborate and more widely and commonly used than
a simple heuristic
(see that word).

The largely flawed Ptolemaic model in astronomy kept its dominance
for 14 centuries!

It is thus a shortcut to call the standard / mainstream theory in a given
field of knowledge.

In that area and during a rather long period, it is the "pop theory" that
is used in most models and methods to understand / interpret situations
and make decisions

It is largely shared by the specialists, but often also in a stereotyped /
simplified or allegoric way, by the general public. Then it becomes a
"meme" (see that word).

Are paradigms usually sustainable?

Eternal truth?

Usually, standard paradigms:

Hold for a rather long time, as humans

are beings of anchoring, habits and commitments.

They have difficulty in accepting new ideas / beliefs as the old
creeds, even if they became less relevant, are sticky and acquired
a semblance of eternal beauty (see cognitive dissonance).

Thus people or institutions can be committed (see
to a paradigm in which they invested
money, learning, work and even their career and that
brings income and/or social authority / justification /

In case its relevancy starts to raise doubt, people are often opposed
to "de-learn" and abandon it - or at least adjust it - as this
would menace their vested interests.

A paradigm takes a long time to die or to evolve, except if a strong
shock accelerates its decay.

Tend after a while to eat outside their plate and
"overreach" themselves

They get overused to explain more and more phenomena, even
outside their original field (halo effect).

But they are not eternal.

After a few decades (sometimes longer) they are often
replaced, or at least completed or modified
by an alternative one (paradigm shift).

A paradigm that is widely taught today and is largely referenced
in Wikipedia might be already kaput in some research circles.

Poor (and dangerous) versions of paradigms

A paradigm about paradigms is that a paradigm
can make you lazy .

Paradigms are seen as elegant and convincing explanations.

They are often useful and time-saving decision tools.

But if a paradigm is used naively and lazily,

as a sky-given universal certainty,

without asking questions and taking some precautions,
it can lead to a dogma, a common thinking / belief, a
simplified generalization / heuristic (see that word).

In such cases it can do more harm than good.

Often, people

not only do not understand fully what the paradigms they tend to apply
   are about,

but also forget to dig deeper to see whether they are relevant or not to
   the situation.

To guide their decisions, they often follow and use paradigms
mechanically in their simplest and narrowest form.

Such crude, reductive, stereotyped, impoverished and
caricatured forms
became common heuristics but with just a
bit more science in them.

Two common examples in economics are "Keynesianism", or
"supply side economics".

Both have become buzzwords that give a crude and oversimplified idea of
two theories that are quite complex. Such simplification make see one or
the other (they rather oppose each other) as a panacea against any
economic ill.

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This page last update: 26/08/15  

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