I am doing some reading on the (historical) emergence of the Black-Scholes implied volatility smile for index options (yes - post 87), and I stumbled across an economic paper attempting to explain the smile using ideas like update of rational expectations and state-dependent utility of representative investors...Unfortunately this was not the only paper I read, that sounded like that.
Aside from the volatility smile, this exercise made me think of fat tails in general, correlation of volatility, bubbles, crashes, etc. - and left me wondering if classical economics can explain any of them?
I have read a couple of explanations for economic rational bubbles, although the comparison of this theory, to empirical findings, appears to suggest it is inaccurate.
I am beginning to think classical economics is like religion: only useful if you actually believe in it. Are there any references that present a different view?