Wednesday, February 25, 2009

Why I Hate Economists (Except Paul Volcker)

Volcker gets a pass because he is a smart, hardass. The rest are wimps. Here's why I don't like them. They have unbelievable and unjustified influence on society and in government, AND their math is flawed. These are not brain surgeons and would get laughed out if they even tried to take the medical aptitude tests (which incidentally don't require any actual medical knowledge.)

Okay, if you don't believe me, consider the Long Term Capital Management case from not so many years ago. No less than two Nobel prize winning economists designed their trading strategies and asserted that what happened to the firm (a total collapse, losing billions) was a "ten-sigma" event. I'm not here to give a statistics lesson, but "10-sigma" is never supposed to happen in the history of the universe. That's about the equivalent of having a black hole eat up the earth. Bear Stearns was a "ten-sigma" event. Lehman Brothers was a "ten-sigma" event. Merrill Lynch was a "ten sigma" event. AIG was probably a "12-sigma" event, Citigroup is about to become a "ten-sigma" event. How many times are we going to have black holes consume the earth?

So all these things occurred. What's wrong here...did we get eaten up by a black hole (many times over) or was their math horribly flawed? Obviously that's a rhetorical question.

Here's the problem. The curve is a wonderful human invention, as is calculus, but neither describes the real world. Both presume that if you are on a certain trajectory (positive or negative), that this will continue.

The world doesn't work that way. We operate in fits and starts with wild oscillations being the fact, in nature, if you look close enough, there are no smooth curves, or even flat surfaces...everything is bumpy. (See Fractal Geometry for more on this.)

But the economists have developed their tool sets assuming that the curve is the supreme being. That's why they are wrong so often.

It scares the hell out of me that we have guys (economists) like Summers (who personally tanked the Harvard endowment...see an earlier post for this) and Greenspan (why haven't you hanged yourself yet?, again see a prior blog) and Bernanke running all this crap.

They do not subscribe to the theory I describe which has been eloquently detailed by N.N. Taleb in "The Black Swan."

We are indeed in a "turbulent time" as Greenspan entitled his book. His main mistake was in assuming that we were never in a turbulent time before...turbulence is part of the human condition.

Incidentally, I threw Greenspan's book, a carefully wrapped dust-jacket, first-edition into the trash which is the first time I have ever done something like this.


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