The efficient market hypothesis — pseudoscientific mumbo-jumbo​

30 Mar, 2018 at 11:51 | Posted in Economics | 3 Comments

The efficient market hypothesis — EMH — argues there is no free lunch and prices are ‘right.’ Well, as we all know, that is not true. dogNoise does influence asset prices and the law of one price is blatantly violated again and again.

Of course, THERE ARE IDIOTS, as Larry Summers once (in)famously put it. When visiting Chicago, look around …

The price is often wrong, and sometimes very wrong … If policy-makers simply take it as a matter of faith that prices are always right, they will never see any need to take preventive action. But once we grant that bubbles are possible, and the private sector appears to be feeding the frenzy, it can make sense for policy-makers to lean against the wind in some way.

Central banks around the world have had to take extraordinary measures to help economies recover from the financial crisis. The same people​ who complain most about these extraordinary measures​ are also those who would object to relatively minor steps to reduce the likelihood of another catastrophe. That is simply irrational.

Richard Thaler

Mathematical economics — an unmixed evil

29 Mar, 2018 at 18:15 | Posted in Economics | 2 Comments

Balliol Croft, Cambridge
27. ii. 06
My dear Bowley,

I have not been able to lay my hands on any notes as to Mathematico-economics that would be of any use to you: and I have very indistinct memories of what I used to think on the subject. I never read mathematics now: in fact I have forgotten even how to integrate a good many things.

marshallBut I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules — (1) Use mathematics as a short-hand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This last I did often.

I believe in Newton’s Principia Methods, because they carry so much of the ordinary mind with them. Mathematics used in a Fellowship thesis by a man who is not a mathematician by nature — and I have come across a good deal of that — seems to me an unmixed evil. And I think you should do all you can to prevent people from using Mathematics in cases in which the English language is as short as the Mathematical …

Your emptyhandedly,
Alfred Marshall

Hinterm Horizont

29 Mar, 2018 at 18:07 | Posted in Varia | 2 Comments

 

The face of a real hero

29 Mar, 2018 at 10:08 | Posted in Politics & Society | Comments Off on The face of a real hero

frenchFrench policeman Arnaud Beltrame, shot to death by an Islamist gunman when he swapped himself for a hostage in a supermarket siege in the southwest town of Trèbes.

Keynes’ beauty contest

28 Mar, 2018 at 19:55 | Posted in Economics | 2 Comments

beautyProfessional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each​ competitor has to pick not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgement are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.

J M Keynes General Theory

Still the best description of the logic of financial markets. Professional money management is at heart a guessing game where investors try to guess what other investors guess about other investors guess about the future …

Assar Lindbeck-medaljen

28 Mar, 2018 at 13:38 | Posted in Varia | 1 Comment

Sveriges nationalekonomer träffas i höst på Linnéuniversitet i Växjö för en numera återkommande vartannat års-konferens. Utöver forskningsseminarier arrangeras utdelning av Assar Lindbeck-medaljen …

Juloratoriet (personal)

27 Mar, 2018 at 16:49 | Posted in Varia | Comments Off on Juloratoriet (personal)


Filmer kan beröra oss på många olika sätt. De flesta är spännande eller roliga tidsfördriv. Men sen finns också de riktigt stora filmerna. De som tar tag i oss och tränger djupt under skinnet och skakar om oss. För alltid.

Kjell-Åke Anderssons filmatisering av Göran Tunströms Juloratoriet — med gudabenådad musik av Stefan Nilsson — är en sådan film. Det är en av de sorgligaste filmer som kan ses. Men på samma gång kanske också den allra vackraste. Den om kärlekens oändliga styrka och kraft.

Jerry Williams (1942-2018)

27 Mar, 2018 at 12:51 | Posted in Varia | 1 Comment

 
En legend har gått ur tiden. Och ja, det stora vemodet rullar in, när man tänker på alla dessa år denne ‘working class hero’ med allt sitt engagemang, sociala patos och musik spridit glädje och ljus i våra liv. R.I.P.

Why game theory never will be anything but a footnote​ in the history of social science

27 Mar, 2018 at 11:55 | Posted in Economics | 3 Comments

Half a century ago there were widespread hopes game theory would provide a unified theory of social science. Today it has become obvious those hopes did not materialize. This ought to come as no surprise. Reductionist and atomistic models of social interaction — such as the ones mainstream economics and game theory are founded on — will never deliver sustainable building blocks for a realist and relevant social science. That is also — as yours truly argues in the latest issue of real-world economics review — the reason why game theory never will be anything but a footnote in the history of social science.

Lars Pålsson Syll_06Heavy use of formalism and mathematics easily foster the view that a theory is scientific. But although game theory may produce ‘absolute truths’ in imaginary model worlds, in the real world the game theoretic models are nothing but — as Rubinstein (2012a) puts it — fables. Fables much reminiscent of the models used in logic, but also like them, delivering very little of value for social sciences trying to explain and understand real-life phenomena. The games that game theory portrays are model constructs, models without significant predictive capacity simply because they do not describe an always much more complex and uncertain reality …

Although some economists consider it useful to apply game theory and use game theoretical definitions, axioms, and theorems and (try to) test if real-world phenomena ‘satisfy’ the axioms and the inferences made from them, we have argued that that view is without warrant. When confronted with the real world we can (hopefully) judge if game theory really tells us if things are as postulated. The final court of appeal for models is the real world, and as long as no convincing justification is put forward for how the inferential bridging de facto is made, model building is little more than hand-waving that give us rather little warrant for making inductive inferences from the model world to the real world.

The real challenge in social science is to accept uncertainty and still try to explain why different kinds of transactions and social interactions take place. Simply conjuring problems away by assuming patently unreal things and treating uncertainty as if it was possible to reduce to stochastic risk, is like playing tennis with the net down. That is not the kind of game that scientists working on constructing a relevant and realist science want to play.

Keynes’ critique of econometrics — still valid after all these years

26 Mar, 2018 at 19:24 | Posted in Statistics & Econometrics | 2 Comments

To apply statistical and mathematical methods to the real-world economy, the econometrician has to make some quite strong assumptions. In a review of Tinbergen’s econometric work — published in The Economic Journal in 1939 — John Maynard Keynes gave a comprehensive critique of Tinbergen’s work, focusing on the limiting and unreal character of the assumptions that econometric analyses build on:

(1) Completeness: Where Tinbergen attempts to specify and quantify which different factors influence the business cycle, Keynes maintains there has to be a complete list of all the relevant factors to avoid misspecification and spurious causal claims. Usually, this problem is ‘solved’ by econometricians assuming that they somehow have a ‘correct’ model specification. Keynes is, to put it mildly, unconvinced:

istheseptuagintaIt will be remembered that the seventy translators of the Septuagint were shut up in seventy separate rooms with the Hebrew text and brought out with them, when they emerged, seventy identical translations. Would the same miracle be vouchsafed if seventy multiple correlators were shut up with the same statistical material? And anyhow, I suppose, if each had a different economist perched on his a priori, that would make a difference to the outcome.

J M Keynes

(2) Homogeneity: To make inductive inferences possible — and being able to apply econometrics — the system we try to analyse has to have a large degree of ‘homogeneity.’ According to Keynes most social and economic systems — especially from the perspective of real historical time — lack that ‘homogeneity.’  It is not always possible to take repeated samples from a fixed population when we were analysing real-world economies. In many cases, there simply are no reasons at all to assume the samples to be homogenous.

(3) Stability: Tinbergen assumes there is a stable spatio-temporal relationship between the variables his econometric models analyze. But Keynes argued that it was not really possible to make inductive generalisations based on correlations in one sample. As later studies of ‘regime shifts’ and ‘structural breaks’ have shown us, it is exceedingly difficult to find and establish the existence of stable econometric parameters for anything but rather short time series.

(4) Measurability: Tinbergen’s model assumes that all relevant factors are measurable. Keynes questions if it is possible to adequately quantify and measure things like expectations and political and psychological factors. And more than anything, he questioned — both on epistemological and ontological grounds — that it was always and everywhere possible to measure real-world uncertainty with the help of probabilistic risk measures. Thinking otherwise can, as Keynes wrote, “only lead to error and delusion.”

(5) Independence: Tinbergen assumes that the variables he treats are independent (still a standard assumption in econometrics). Keynes argues that in such a complex, organic and evolutionary system as an economy, independence is a deeply unrealistic assumption to make. Building econometric models from that kind of simplistic and unrealistic assumptions risk producing nothing but spurious correlations and causalities. Real-world economies are organic systems for which the statistical methods used in econometrics are ill-suited, or even, strictly seen, inapplicable. Mechanical probabilistic models have little leverage when applied to non-atomic evolving organic systems — such as economies.

Building econometric models can’t be a goal in itself. Good econometric models are means that make it possible for us to infer things about the real-world systems they ‘represent.’ If we can’t show that the mechanisms or causes that we isolate and handle in our econometric models are ‘exportable’ to the real-world, they are of limited value to our understanding, explanations or predictions of real-world economic systems.

(6) Linearity: To make his models tractable, Tinbergen assumes the relationships between the variables he study to be linear. This is still standard procedure today, but as Keynes writes:

It is a very drastic and usually improbable postulate to suppose that all economic forces are of this character, producing independent changes in the phenomenon under investigation which are directly proportional to the changes in themselves; indeed, it is ridiculous.

To Keynes, it was a ‘fallacy of reification’ to assume that all quantities are additive (an assumption closely linked to independence and linearity).

2014+22keynes%20illo2The unpopularity of the principle of organic unities shows very clearly how great is the danger of the assumption of unproved additive formulas. The fallacy, of which ignorance of organic unity is a particular instance, may perhaps be mathematically represented thus: suppose f(x) is the goodness of x and f(y) is the goodness of y. It is then assumed that the goodness of x and y together is f(x) + f(y) when it is clearly f(x + y) and only in special cases will it be true that f(x + y) = f(x) + f(y). It is plain that it is never legitimate to assume this property in the case of any given function without proof.

J. M. Keynes “Ethics in Relation to Conduct” (1903)

Real-world social systems are usually not governed by stable causal mechanisms or capacities. The kinds of ‘laws’ and relations that econometrics has established, are laws and relations about entities in models that presuppose causal mechanisms and variables — and the relationship between them — being linear, additive, homogenous, stable, invariant and atomistic. But — when causal mechanisms operate in the real world they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. Since statisticians and econometricians have not been able to convincingly warrant their assumptions of homogeneity, stability, invariance, independence, additivity as being ontologically isomorphic to real-world economic systems, Keynes’ critique is still valid.

In his critique of Tinbergen, Keynes points us to the fundamental logical, epistemological and ontological problems of applying statistical methods to a basically unpredictable, uncertain, complex, unstable, interdependent, and ever-changing social reality. Methods designed to analyse repeated sampling in controlled experiments under fixed conditions are not easily extended to an organic and non-atomistic world where time and history play decisive roles.

Econometric modelling should never be a substitute for thinking. From that perspective, it is really depressing to see how much of Keynes’ critique of the pioneering econometrics in the 1930s-1940s is still relevant today.

The general line you take is interesting and useful. It is, of course, not exactly comparable with mine. I was raising the logical difficulties. You say in effect that, if one was to take these seriously, one would give up the ghost in the first lap, but that the method, used judiciously as an aid to more theoretical enquiries and as a means of suggesting possibilities and probabilities rather than anything else, taken with enough grains of salt and applied with superlative common sense, won’t do much harm. I should quite agree with that. That is how the method ought to be used.

Keynes, letter to E.J. Broster, December 19, 1939

McCloskeyian rhetoric

25 Mar, 2018 at 18:36 | Posted in Economics | 1 Comment

This is not new to most of you of course. You are already steeped in McCloskey’s Rhetoric. Or you ought to be. After all economists are simply telling stories about the economy. Sometimes we are taken in. Sometimes we are not.

spin-meme-generator-dont-say-capitalism-replace-it-with-either-economic-freedom-or-free-market-3ba401Unfortunately McCloskey herself gets a little too caught up in her stories. As in her explanation as to how she can be both a feminist and a free market economist:

“The market is the great liberator of women; it has not been the state, which is after all an instrument of patriarchy … The market is the way out of enslavement from your dad, your husband, or your sons. … The enrichment that has come through allowing markets to operate has been a tremendous part of the learned freedom of the modern women.” — Quoted in “The Changing Face of Economics – Conversations With Cutting Edge Economists” by Colander, Holt, and Rosser

Notice the binary nature of the world in this story. There are only the market (yea!) and the state (boo!). There are no other institutions. Whole swathes of society vanish or are flattened into insignificance. The state is viewed as a villain that the market heroically battles against to advance us all.

It is a ripping tale.

It is shallow and utterly misleading.

Peter Radford

Programmet som gör det värt att betala varenda krona i radio- och tv-avgiften

25 Mar, 2018 at 17:18 | Posted in Varia | 3 Comments

radioI dessa tider, när ljudrummet dränks i den kommersiella radions tyckmyckentrutade ordbajseri och fullständigt intetsägande pubertalflamsande tjafs, har man nästan gett upp.

Men det finns ljus i mörkret.

I programmet Text och musik med Eric Schüldt — som sänds på söndagsförmiddagarna i P2 mellan klockan 11 och 12 — kan man lyssna på seriös musik och en programledare som har något att säga och inte bara låter foderluckan glappa. En lisa för själen.

I dagens program kunde man bland annat höra detta oändligt vackra stycke musik

Tack Eric för ett fantastiskt program som bara det är värt varenda krona som läggs på radio- och tv-avgiften!

‘Rational choice’ history — a case of models not fitting the facts

24 Mar, 2018 at 17:01 | Posted in Economics | 6 Comments

Rational choice history is in a worse situation than that of either mechanistic biology in the seventeenth century or of sociobiology today. The analogy would be appropriate if it were mainly a question of refining the theories and of gathering more evidence. One could refine theory by incorporating bounded rationality and quasi-rational choice, so as to match more closely the way in which actual decisions are made. One could gather more evidence by paying careful attention to sources that illuminate the beliefs and goals of the actors …

an narrThe need for modesty appears in two ways. First, as I have been at some pain to emphasize, one should avoid the postulate of hyperrationality. Collective action, iterated games, and credibility are simple ideas that can be and have been refined to yield rococo (or baroque?) constructions that no longer bear any relation to observable behavior. To be useful, they have to be constrained by what we know about the limitations of the human mind. Second, because formal analysis has nothing to say about the motivation of the agents, it cannot by itself yield robust predictions. Although it is extremely useful to know that the structure of material interests in a given case is that of a one-shot Prisoner’s Dilemma, that fact does not by itself imply anything about what the agents will do. If they have nonmaterial or even nonrational motivations, they might behave very differently from the noncooperative behavior we would expect if they were exclusively swayed by material interests. If they are in fact observed to cooperate, then we will have to search for nonmaterial or nonrational motivations. Rational choice theory tells us what to look for, not what we will find.

 Jon Elster

Parce mihi domine

24 Mar, 2018 at 09:55 | Posted in Varia | Comments Off on Parce mihi domine

 

National security adviser John Bolton — a bullying madman

24 Mar, 2018 at 09:19 | Posted in Politics & Society | Comments Off on National security adviser John Bolton — a bullying madman

John R. Bolton, chosen by President Trump to be his new national security adviser, does not need the Senate’s endorsement to succeed H. R. McMaster in the job. But in 2005, the extraordinary refusal to confirm his nomination to be President George W. Bush’s ambassador to the United Nations by a Republican-controlled committee is worth revisiting for what it revealed about Mr. Bolton and what it may portend for our national security.

Bolton-1200x723One moment singularly derailed his nomination. Testifying before the usually staid Senate Foreign Relations Committee in April 2005, Carl W. Ford Jr. — the former assistant secretary of state for intelligence and research — called Mr. Bolton a “kiss-up, kick-down sort of guy” and a “serial abuser” of people beneath him in the chain of command. Mr. Ford — a self-described conservative Republican and Bush supporter — made vivid an emerging portrait of Mr. Bolton as a bully who repeatedly sought retribution against career intelligence analysts with the temerity to contradict him …

Other witnesses came forward to allege abusive behavior by Mr. Bolton during his time as a lawyer in the private sector — screaming, threatening, throwing documents and, in the words of one woman, “genuinely behaving like a madman.”

Antony Blinken/New York Times

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