Liveblogging a Slatecast on Justin Fox’s Myth of the Rational Market

24 06 2009

My dinner listening: at Slate, Daniel Gross interviews Justin Fox on The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street. I Statler-and-Waldorf my way in italics through a fascinating conversation, snippets of which have been transcribed:

JF: Right at the turn of the century there was this French mathematician who wrote his dissertation on the movements of securities prices on the Paris Exchange, and his formula for representing the randomness of these movements was what later came to be called Brownian motion… so there was this early tie-in that basically Albert Einstein’s description of Brownian motion a few years later helped lead to molecular physics, which helped lead to the atomic bomb.
But the more specific one is, during World War II, these people, Milton Friedman, there were artillery officers flying back in the middle of the Battle of the Bulge to ask Milton Friedman for advice on how to score the artillery shells to balance, basically, risk and reward. It’s how many–if you got more pieces, you’re more likely to hit, if you got bigger pieces, you’re more likely to do damage.
And just a couple of years later, Harry Markowitz, whose–Friedman was on his dissertation committee–wrote this famous portfolio theory, descriptions of how to invest that, in Friedman’s assessment, and I would agree, was basically exactly the same in form as the equations they used to figure out how to score artillery shells.
Well, humanists, horrified yet? Or breaking out in gallows smiles? If you wanted Pynchonesque… Yet on a pure mathemathical plane, this seems like: Duh.
DG: In the 70s, this idea that–and it’s not just that the markets are right, it’s that prices–and the price action you see is telling you everything you need to know about what’s going on in the world.
So this is when my atavistic magical-thinking mind perks up and says, Ooh, sounds fantastical. Talismanic. The power and information invested runelike in numbers on a sticker cunningly designed in an earlier era to thwart shoplifting (or so I’ve always assumed) by not conveniently peeling off in a single piece. So that what’s glowering at you there in the store is… in a way, the entire history of an item encoded in commercial value. Of course, I don’t think retail are the prices they’re talking about.
DG: Uh, what struck me throughout, and–is that, y’know, economists think of themselves–they think of themselves as scientists. They’re certainly not humanists. They have rules and formulas, etc. But so much of this is… isn’t in the realm of science, but is in the realm of faith, and time and again, there is language that talks of this as a religion.
Aaaand… I am vindicated, by one of those inexhaustible if hardly original observations. Maybe I only process ideas as metaphors, and need minds smarter and better at fact-crunching to run them through the mill of art at least once: see how I’m flattered into some understanding of physics, all the more sparkling for its shallowness, by Tom Stoppard’s Arcadia, a play whose scintillation rises up from true depths.
JF: I like economists. I like the way they think about the world. I think it’s really useful. There are these critics within the economics profession like Jamie Galbraith… Their criticisms are great, but when it comes down to what they want economics to be, it sounds a lot like comp lit…
Not sure what this means, but he does not elaborate. We end with the final dire observation:
JF: Economics as practiced today is an incredibly ahistorical field.
Recalling Twain’s marvelous dictum: “The only thing new under the sun is the history we haven’t yet learned.”
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