[FoRK] "Common" delusions? was re: How Complex Systems Fail

Bill Stoddard wgstoddard at gmail.com
Sun Nov 8 07:57:23 PST 2009


Jeff Bone wrote:
>
> Bill wrote:
>
>> Perhaps (aforementioned delusion) as common as belief in 'efficient 
>> market theory' & pixie dust.. :-)
>
> And Ken responded:
>
>> Believe it. :-) ...ken...
>
> I, um, "know some folks" who work in applied economics and various 
> financial markets.  ;-)  I don't actually know *anyone* who "believes" 
> in "efficient market theory."  (More correctly, efficient market 
> hypothesis... and in fact there is no such singular hypothesis, there 
> are several;  they are expressions of the behaviors, limits and 
> constraints of idealized markets under certain assumptions, which 
> nobody actually claims are true of any particular actual markets.)
>
> I think the common or at least popular delusion here is that anyone 
> with a clue actually regards any efficient market hypothesis as being 
> some realistic model of real markets.  Of *course* real markets aren't 
> efficient;  they are incomplete, fragmented, non-transparent, 
> asymmetric, have inconsistent internal and external rules, have lossy 
> and laggy information paths, are often driven by outright incorrect 
> information, and are very much "dispersed" in the very sense 
> previously discussed. But the fact that they aren't efficient doesn't 
> mean that the abstract model of market efficiency isn't useful;  it's 
> just a limited model, a lossy compression of reality.  As such it's no 
> more or less useful than, say, Newtonian mechanics;  it's a reasonable 
> approximation of certain things under certain conditions, but with 
> *known* limits.
>
> Thinking that obvious inefficiencies in real markets somehow damningly 
> "disprove" efficient market hypotheses is similar to the Kirk Cameron 
> and friends' "eyeball" arguments against evolution;  i.e., it's only 
> an argument that somebody who doesn't understand what others are 
> really claiming would make, perhaps one that only somebody would make 
> who doesn't understand what a hypothesis is in the first place would 
> make.  (Actually, this isn't a very good analogy.  It's undoubtedly 
> the case that early EMH-ers literally believed their hypotheses were 
> higher-fidelity models of the phenomenon of interest than they 
> actually are.  But in part, this was because they didn't have good 
> theories of complex systems:  chaotic equilibria, information-, game-, 
> and measure-theoretic views of things, networking queueing theory, and 
> so on.  It is *precisely* through such things --- without invoking the 
> spectre of "behavioral" economics or anything similar --- that we can 
> understand the recent failures --- and potentially avoid future ones.  
> If only we're reasonable enough, determined enough, and diligent 
> enough to do so...  which seems unlikely in the extreme.)
>
> Here's your homework:  consider why special relativity *proves* that, 
> in the limit, efficient markets (in the EMH sense) aren't possible.  
> Then consider whether this means that various EMH variants are 
> therefore without useful application...

Of course,  of course... my formal education is in Physics and 
Electrical Engineering; I get it.   Engineers and Physicists understand 
the limits of simplified abstract models. Unlike Newtonian mechanics,  
EMH has limited practical use outside the classroom.  My snide sideswipe 
at EMH is mainly a response to rabid Randians I encounter (in other 
venues) that accept EMH as a founding principle of free markets.  They 
are also advocates of political positions consistent with their worship 
of the EMH.  That's my beef...

Bill




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