Wednesday, August 29, 2012

Climate Change to the Rescue

Howard Davies was Director of the London School of Economics (2003-11), so you would think he understands economics. Instead, he writes a lame criticism of a caricature of economics. In the process, he notes:
Robert May, an eminent climate change expert, has argued that techniques from his discipline may help explain financial-market developments. Epidemiologists have suggested that the study of how infectious diseases are propagated may illuminate the unusual patterns of financial contagion that we have seen in the last five years.
They might, but as climate change models use 1970s-era macro models within them as part of their feedback loop, I highly doubt it. So might cardiology, or aeronautics. That the head of the LSE thinks these fields are really fruitful suggests he has never read any of these prior attempts, which given his age, suggests he hasn't read any economics over the past 20 years. Given the strongly partisan tone to many esteemed economists when discussing their specialty on the topics of the day, I will strongly recommend my kids don't choose this as a major.

Now, I'm prejudiced to be sure, a Friedmanite-conservative, but I like to think I don't simply refute my opponent's weakest arguments via some argument like 'huh?' or some other sarcasm.  That's not reasoning.

That is, it's improbable that two essays of equal quality will receive the same grade if they are consistent with either free-market or Keynesian policies given the prejudices of the professor, which means all they learn is how to say things that support a predetermined view, which isn't real wisdom. A couple of key classes is sufficient (intro finance, intermediate micro, intro macro, game theory, derivatives pricing), and the gist of these will probably be reducible to a series of Khan Academy videos by then.


Jacob A. Geller said...

"They might, but as climate change models use 1970s-era macro models within them as part of their feedback loop, I highly doubt it."

Umm or, as one Howard Davies put it about a week later:

"These are fertile fields for future study, but what of the core disciplines of economics and finance themselves? Can nothing be done to make them more useful in explaining the world as it is, rather than as it is assumed to be in their stylized models? ...painful experience tells us that economic agents may not behave as the models suppose they will."

Anonymous said...

meh college essays are just about writing what the teacher wants to hear, and figuring out your own thoughts separately. It's probably a somewhat useful skill but not something people brag about. I'm sure your kids could fend for themselves in an econ major, and if they're taking derivatives pricing they're practically majoring in it anyways

Tel said...

... intro finance, intermediate micro, intro macro, game theory, derivatives pricing ...

All good things, but you yourself pointed out that academics have to keep up with the times. I suggest starting out by studying bankruptcy law, and working backwards from there.

Putting all jokes aside though; has anyone made a serious effort at taking 30 year global averages of stock prices? Some stocks might not run the whole 30 years, but don't worry, just fish around for something with a similar sounding name that starts around the same time the other one finished up and simply splice the two series together! You will no doubt want to insert adjustments into this process, throw away any data you don't like, and under no circumstances document why or how you did that.

Once you get your global average together, no one will be able to argue anymore. Only an anti-science Neanderthal, dinosaur, Luddite would argue, because all science is 100.00012% proven. A very important person told me that. It was reviewed by peers and everything.

Eric Falkenstein said...

Jacob: I don't quite get your point, but let me add that I'm not against changing assumptions within their models, indeed, I just wrote a book doing just that. Rather, I find it silly to point to vast other fields, instead of merely saying very specifically what assumption should be changed. That is, how do you change agents from rationality? there are a million ways, so of course one might be better, but you need to be specific.

Anonymous said...

good one, tel.

Pete S said...

Some modelling techniques are first applied in one discipline, but useful to many. The same technique used to model spread of infectious diseases (and epidemics) has also been used to model the rate of adoption of innovations.
Duration modelling was first used to measure mortality rates after a diagnosis. But they were also useful in modelling the MTBF (mean time between failure) for electronic components and inter-purchase timing in marketing.
I've got other examples I won't list here.
It shouldn't be surprising that a good model can be applied to multiple fields.