Mandelbrot Beats Economics in Fathoming Markets(bloomberg.com) |
Mandelbrot Beats Economics in Fathoming Markets(bloomberg.com) |
This view was prevalent in the world of ecology for decades, and led to all that guff about "nature's balance" and "spaceship earth" that we had to put up with for so long. It turned out that these ideas were based on falsified studies.
Adam Curtis addressed these ideas and more in his recent series of films, All Watched Over By Machines Of Loving Grace. Specifically, the second episode: "The Use and Abuse of Vegetational Concepts." The other episodes cover Ayn Rand and her effect on US economic policy, and the Selfish Gene theory and its murky origins in the wartorn Congo. And a whole lot of other stuff.
http://en.wikipedia.org/wiki/All_Watched_Over_by_Machines_of...
I highly recommend it, along with his other works, although you should be careful not to suspend your critical faculties in the headlights of his psychedelic filmmaking techniques.
His train of thought narration and brilliant music is just opium for people who aren't concentrating.
At the very least people should watch them simply for the treasure trove of historical accounts and strange characters contained within, even if they don't believe a word of the conclusions he draws from them.
I think it's more that
1. Systems that spin irreversibly out of equilibrium usually fall apart and so are not observed; and
2. For a long time, there was a dearth of mathematical tools for dealing with complex or chaotic systems.
Most attacks on economists about believing in this or that $obviously_ridiculous_belief are strawmen, giving credit neither for the subtleties of the actual concepts nor the self-awareness of economists themselves.
In nature stability - on average - is often achieved by matching peaks and troughs, not by a lack of change (nature abhors a lack of change)
(see vacuum fluctuations)
or at least in somewhat understandable models beyond simple linear ones:
A popular model of a negative feedback relationship in markets is called the 'Demand curve'.
See: - Loss aversion http://en.wikipedia.org/wiki/Loss_aversion - Sunk cost effects: http://en.wikipedia.org/wiki/Sunk_cost - Status quo bias: http://en.wikipedia.org/wiki/Status_quo_bias
To claim that humans are inherently rational is to deny the widespread existence of psychological pathologies.
"Pooling sovereign debt absolves the most irresponsible nations from confronting their unsustainable spending by forcing more responsible nations to pick up the tab. All of the incentives are weighted in favor of irresponsibility and none to responsibility. No pie-in-the-sky plan by the EU to dictate budgets to its members will ever work. The members will either ignore such interference or, as has already happened, cook the books to make it appear that they are doing so." – From Philipp Bagus' The Tragedy of the Euro
I didn't say anything about northern European countries being superior. It's a completely factual statement to say some countries are more solvent than others. It's not a value judgement.
I don't think most economists would seriously suggest that the market lives, should live, or ideally would live in a static equilibrium. I know that most economists wouldn't say they can predict the fluctuations of the market. The ones that think they can, of course, get disproportionate amounts of airtime on CNBC or wherever, so it's an understandable misapprehension.
"almost without exception, economists since Adam Smith have viewed economic systems as being in balance or equilibrium, and as having a natural tendency to return there after any disturbance. In this view, crises can be understood only as anomalies, the consequences of unusual outside shocks."
That quote shows a huge lack of contextual knowledge. A more accurate quote could be that since BEFORE Adam Smith Economists have disagreed on this point. (Menger/Walras, Rothbard/Schumpeter etc etc etc)
Take this quote "Nothing in mainstream “neoclassical” finance theory explains these persistent crises." That may be true but if so it merely reflects a weakness of neoclassical finance theory and not of our knowledge of economics as a whole.
In fact Keneyesian theory explains the boom and bust cycle as well as the periodic crises very well and has a pretty good solution for dealing with them. In fact we did deal with them pretty well during the postwar period of expansion and prosperity. Then of course we started progressively departing from Keneysian theory under the tutelage of the Chicago school and the crises, as if by clockwork, started intensifying and the crashes started getting worse.
So the answer is obvious, the theory is well known. The problem is that the new economists do not want to admit it because (i) they do not want to admit they are wrong and (ii) they sure as hell do not want the correct medicine that Keynesian theory prescribes.
So they go on with this ridiculous farce where they pretend that the economics crises are some unexplained phenomenon.
Though in recent times people tend to pick and choose which models they base their thinking on, depending upon their chosen political agenda.
Brief example: There has been a lot of political hand waving about possible inflation or even hyperinflation. If you look at a version of the Phillips Curve, unemployment and inflation have an inverse relationship. High unemployment = low inflation or worse. And inflation has remained low, while deflation has actually been more of a threat, and is actually a problem in many countries.
Wikipedia seems to think that the 1970s in the US show that it doesn't work.
In economy, you find out that whenever "Gentleman Jim" bets, he tends to win 70% of the time, rather than the 49% everyone else gets. Now, depending on policy, you either:
a) forbid jim to play b) readjust jim's token-to-money conversion ratio so he is on par with other players c) invest your money with jim
Note, though, that this being a zero sum game, anything other than (a) will bankrupt the house....
Sure if economics could be reduced to gambling it is zero-sum but betting in economics is betting on those who will create value(ideally).
As to the Omori distribution, have they actually succeeded in making forward looking predictions with it, or were they just fitting a model to past data? Even if it is a real phenomenon, I can think of a way to extract money from the market by making it go away off the top of my head, so I don't imagine it will last long now that it's been reported in public.
The parts about equilibrium models being taken too seriously are well taken, though.
As for the Omori distribution, I do not know anything about it, but I have studies similar distributions for predicting future Olympic running records,tallest human alive, etc, and these types of distributions rarely produce practically feasible results. If this model works well, I will be thoroughly impressed.
The only field that I know which deals with extreme events is Ruin Theory, but it is currently a very limited field. It may be possible for someone to adapt the field to study Macroeconomics, but even that may not be very informative.
At humanities current understanding of economics, I would argue that Black Swan Theory is the only practical way to understand huge economic shifts. Perhaps we will understand economic markets well enough to develop more complicated models, but that seems far in the future.
Q-Q plot: http://en.wikipedia.org/wiki/Q-Q_plot Ruin Theory: http://www.worldscibooks.com/etextbook/5943/5943_chap01.pdf
More details: http://www.themoneyillusion.com/?p=9677
The purpose of the European Financial Stability Facility is to prevent german and french banks to go bankrupt in case any of the attacked countries default.
"It's a completely factual statement to say some countries are more solvent".
If by some countries you mean the northern countries, this is false: Spain had a superavit before the financial crisis - Germany did not.
Do not confuse opinions with facts.
I was simply pointing out a fact that the ECB pools sovereign debt, and because of that will suffer from the tragedy of the commons - perverted incentives.
1. Identifies baddies and eeeevil plaaaans
2. Said plans go wrong because evil is dumb
3. Smugness.
Or something like that. Essentially his problem is mixing history with histrionics. He's not a documentarist, he's an entertainer. A music video director.
It came from economists asserting the difference between modeling human behavior vs. the behavior of physical objects. In that sense it is not meaningless. It's an important distinction that in order to model human behavior, we have to accept that people's goals are myriad and constantly shifting, and that we can only come to know their goals or preferences by them being revealed in action.
Is it really that different? Try to attach an object to several springs and see if it behaves "rationally".
Physical objects do not have free will. They don't act towards goals. They conform to unchanging mathematical patterns.
Humans do not. What I do today cannot be accurately used to determine what I will do tomorrow.
No matter what you assert somebody's preference is, the preference is only revealed through action.
You can say me going to football games is not in my best interest, but the fact that I act by going to a football game demonstrates that it is.
Not having all the information doesn't negate that I'm the one making the choice. I think you're still referring to "rationality" in the logical sense of 2+2=4 being rational, not in the context of economics.
> I mean, you can't really infer that someone's preference was to fall off a cliff by the mere fact that they did fall off it; they might not have realized that the cliff was there, among other possibilities.
I didn't say all preference is revealed through a single action. I was trying to illustrate that action is the only way to determine preference.
For example, if I have a choice of going to McDonald's or Wendy's, you can't know which one I actually prefer unless I act and choose one over the other (thus preference is ordinal, not cardinal).
If I go to Wendy's, it would be absurd to say that I preferred McDonald's, since I chose to go to Wendy's. Thus, only through action is preference revealed. In the same way, it's absurd to say that someone else made a mistake when they bought an Apple product, because you're speaking of your preferences, since you can't actually know what's going on the head of the other person.
What "rational agent" means in the economic context is, that if Person A goes to Wendy's that says nothing about Person B's preference for Wendy's, since both have free will unlike inanimate objects.
The debate takes on a different dimension when you're talking about political policy, when the weatherman passes a law forcing everyone to wear raincoats on days of high chances of precipitation.