
Mandelbrot Beats Economics in Fathoming Markets - goodwinb
http://www.bloomberg.com/news/2011-12-06/mandelbrot-beats-economics-in-fathoming-markets-mark-buchanan.html
======
JonnieCache
It staggers me that so much prevailing thought still leans towards the idea of
complex, highly connected systems as inherently stable, with their natural
state as equilibrium. It dates back to the victorians, with their "All things
Bright and Beautiful" view of god's creation, which was shattered by darwin.
How long it takes us to learn the important lessons.

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...](http://en.wikipedia.org/wiki/All_Watched_Over_by_Machines_of_Loving_Grace_\(television_documentary_series\))

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.

~~~
adaml_623
I agree with your first 2 sentences but I think that Adam Curtis's 'films'
should not be watched by anyone. Especially someone trying to think about
something like stability and connected systems.

His train of thought narration and brilliant music is just opium for people
who aren't concentrating.

~~~
saurabh
I agree. I have watched almost all of his documentaries. In retrospect,
everything looks like a con. He narrates history as if it was a big plan by
the people in power but he forgets how utterly chaotic the world is. And yes,
it is opium and I enjoyed watching his work.

~~~
jacques_chester
Curtis basically falls for the animistic fallacy: that all events are caused
by conscious agents. This is the same pathway that leads to both religion and
conspiracy theorists.

~~~
JonnieCache
I have always thought Curtis' overall theme (or one of them) was of powerful
people drawing their grand plans, but always ultimately having them thwarted
by external circumstances out of their control.

~~~
jacques_chester
I personally felt that he

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.

------
_delirium
This is a good overview, though as one minor quibble, the critique of
"rational agents" is separate from the critique of equilibrium models: _even
if_ all economic actors are rational agents, that doesn't imply that
everything converges instantly to nice equilibria with an absence of feedback
loops, attractors, and the other typical nonlinear-dynamical-system
pathologies. In fact most agent simulations in AI that use rational agent
models still find all sorts of that weirdness going on.

~~~
dreamdu5t
"Rational agents" in the context of economics does not mean people make the
best choices for maximizing capital preservation. It means that human behavior
is inherently rational because only an individual knows if his choices were in
his best interest.

~~~
balinvadasz
I disagree completely. What about all inherent biases which make humans do
things not in their best interest (they just think it is in their best
interest, but many times they don't think, they panic) ?

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>

~~~
nasmorn
As a trained economist I can attest to the fact that most micro economist view
these issues you raised as basically irrelevant. I understand that it is
basically damning experimental evidence but it is completely disregarded.

~~~
_delirium
I'm not very up on microeconomics, but isn't behavioral economics a hot field
currently? Or are they still seen as outside the mainstream?

------
dreamdu5t
I'm surprised nobody has pointed out that the Euro is a tragedy of the
commons.

"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_

~~~
arijo
Unlike in the US, in europe the central bank can't lend to euro zone
countries. Countries must borrow money from the banks and banks (like Goldman,
Morgan Stanley, Deutsche Bank, etc) lend money to countries at highly
speculative rates. If you had taken the time to inform yourself before opening
your mouth you'd have known that countries like Portugal and Spain had
relativley low deficits (much lower then the US) before the financial crisis.
Please stop with this 'northern european countries superior monkey' narrative.

~~~
dreamdu5t
The ECB purchases member countries' debt. They move bad or weak assets off the
balance sheets of the weak member banks into the balance sheets of the ECB.
The stated purpose of the European Financial Stability Facility is to pool
sovereign debt. The owners and shareholders of the european central bank are
the central banks of member countries.

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.

~~~
arijo
The ECB buys souvereign debt incurred by countries that have no option but to
borrow money from banks that demand very high interest rates - much higher
than the interest rates the ECB charges comercial banks.

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.

~~~
dreamdu5t
I don't know what your trip is with "northern countries." I never brought up
specific countries or mentioned Spain or Portugal.

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.

------
cynicalkane
This article is a straw man.

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.

~~~
ndefinite
I agree with you. I stopped reading at

"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)

------
hristov
This article is pretty idiotic and yet another another attempt by new
economists to try to excuse the terrible financial policies of the last 10
years under the silly and completely wrong slogan "nobody could have possibly
predicted it would all turn out this way." This of course was the same excuse
used for the housing crisis (even though most of the country actually
predicted it) and for the Iraq debacle.

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.

------
smokeyj
I'm always perplexed by the notion of trying to "model" an economy. I don't
understand how aggregate statistics about a market reveal any insight into how
to create sustainable value. I feel like it's similar to knowing the past
winning numbers on a Roulette table, because it provides no actionable insight
to future winning numbers.

~~~
beagle3
On the contrary. Taking your analogy further:

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....

~~~
dereg
Nassim Taleb addresses this sort of thinking. He calls it a "ludic fallacy",
which is the over application of games to our down detriment.
<http://en.wikipedia.org/wiki/Ludic_fallacy>

------
john_horton
For a little background on this debate:
<http://tuvalu.santafe.edu/~jdf/papers/farmer0606.pdf>

------
Symmetry
Wait, did economists think at one point that the distribution of movements in
a stock market followed a Gaussian pattern? I mean, amateur statisticians
approximate things to Gaussian distributions all the time to make the math
easier, but that's hardly a problem unique to economics.

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.

~~~
Indy_Dh
When they say "fat end of the tail," a Gaussian distribution is not
necessarily implied. They are simply saying that when you go to the extreme
ends of any distribution, almost any statistical model will begin to fall
apart. If you look normalized data and look at a Q-Q plot, you will no doubt
see problems at the extremes of the distribution, making those predictions
more difficult.

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>

~~~
ctchocula
Black swan theory is an interesting read.

------
mathattack
It is a fast oversimplification to say that economists lose and Mandelbrot
wins. Eugene Fama (<http://en.wikipedia.org/wiki/Eugene_Fama>) whose Phd
thesis coined the concept of stock prices following a random walk
simultaneously wrote about Mandelbrot distributions
(<http://www.jstor.org/pss/2350971>).

------
binarymax
"The (Mis)behavior of Markets" is a great read on the subject, by Mr.
Mandelbrot himself.

------
VladRussian
"God doesn't play dice". And several decades later Mandelbrot discovered that
God plays fractals.

