Monday, August 25, 2008

Clever vs. Useful

I remember going to a job market presentation around 1993 by a finance PhD from MIT. Jiang Wang went through a presentation to a full set of finance faculty, and at the end, asked if there were any questions. There were none. I thought, boy, this guy bombed. How wrong I was. He was the top guy on the market that year, having solved a complicated problem involving comparing individuals with different utility functions. Previously it was thought you could only explain the heterogeneity by having different coefficients in their functional form, but this guy compared a consumer/investor with a square root utility, to that of a consumer with logarithmic utility. I failed to see the significance, but then I realized that professors love this kind of thing. It was difficult math, and he derived a closed form solution!

So I'm reading Rubinstein's History of the Theory of Investments, which for PhD finance type is a great book. He also notes the spectacular nature of this achievement, saying:
he shows that for certain other specific combinations of powers, closed-form results are possible. He then asks how the results are qualitatively different from an economy with a CRRA representative agent.

Gee, 10 years later, and that's all he can say. Clearly, there weren't any really interesting differences found, or they would have been mentioned. I would call that a dead end. He just got a closed form, and everyone clapped. It reminds me of articles that show 'a rich class of models', as if interesting applications are left as an exercise for the reader.

Why was I born with such contemporaries?


Anonymous said...

Isn't it simply the witches brew that enhances the barriers to entry and prestige of the field?

Practical? Usefull? ha, ha. Warms the practitioners heart.

Anonymous said...

Do you regret not having gone into academia? I am pondering going into industry. Some of the things people in the ivy towers consider important seem so trivial.

Eric Falkenstein said...

well, everything's a game at some level. You just have to ask, are you good at it? Do you find it interesting?