Question for Economic/Finance Students
At the recent Make Markets Be Markets conference, I got to ask a questions of the esteemed panel — Joseph Sitglitz, George Soros, Jim Chanos, Simon Johnson, Elizabeth Warren, etc.
That question was simply this:
Why do Bad Ideas seems to persist for so long? How do certain concepts hang around, long after they have been disproven?
The answers were unsatisfying.
Which brings me to this question for any graduate students, undergraduates and even college Professors: What bad economic or financial ideas are being currently taught in your departments?
Perhaps its the usual nonsense about the rational profit maximizing homo economicus; Maybe its the wonders of Deregulation, and its bastard cousin Self regulation. The Efficient Market Hypothesis is a perennial favorite amongst the tenured set. And any sort of deification of markets also qualifies.
So, college students of America (or their parents), what can you tell me?
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March 23rd, 2010 at 8:42 pm
I teach as an Adjunct at a NY university and have to note the consistently anti-business bias among my peers and students. They cannot accept the recent Supreme Court decision affirming Corporations’ free speech rights, much less rights as a “person” in general. The corporation is characterized as a “psychopath” — having “an inability to feel concern, empathy, guilt or remorse.” <– taken from class presentation.
While that much is perhaps true, the inappropriate implication is that corporations, business generally, and the capitalist system are evil. Our economy depends upon business and growth.
I do NOT find any worship of deregulation or belief in free markets (Labor unions represent the faculty!) Rather, in academe, I find a strong anti-business bias, a general ignorance about productive economic activity, but an unquestioning belief in the institutions of government.
March 23rd, 2010 at 8:43 pm
As a parent, and a University faculty member, I can tell you it has been a gradual erosion of social values since WWII. IMHO the clearest transition is from Becker to Friedman. Micro argued against monopoly and oligopoly, for the little guy consumer. Value grows wealth. Friedman said “screw you little guys” it’s about protecting elite assets and those in power. Control grows wealth for the elites. Ask Chile how that worked out.
Today’s students seem to have very limited notions of social obligation.
And Soros, the superficial enigma, is the perfect example.
He has no qualms whatsoever about capturing billions playing hedges, exchange rates, and commodities. With insider information. One way or another he’s daily raping lots of little guys. Zero sum game.
So what does he do? He funds organizations to continue to give the little guy hope so that he can continue to rape them without social revolution, and pretend to have a social conscience. One penny on the dollar. Cheapo.
So the bottom line is the bad ideas being taught are that corporations and market players, particularly commodity players, are socially sterile profit maximizers above the law.
March 23rd, 2010 at 8:57 pm
Professor Robert Shiller’s course entitled Financial Markets is available online via Yale University’s Open Courses initiative. It may give you a first hand peek into what is being taught at Yale, at least.
http://oyc.yale.edu/economics/financial-markets/content/downloads
March 23rd, 2010 at 9:00 pm
John Quiggin’s new book Zombie Economics (ideas that will not die) covers this exact territory see e.g.
http://zombiecon.wikidot.com/
March 23rd, 2010 at 9:04 pm
Barry, first time long time. Love the site. The worst idea taught in school is that there will be a job waiting for you when you get out.
March 23rd, 2010 at 9:20 pm
The usual suspects are still taught and worshiped – dividend discount model, CAPM, intrinsic value, efficient market theory – all concepts that assume that forecasting future cash flows is easy and correlations remain constant. Some instructors admit that some of the concepts are old and flawed, but then add then we have to know them. In my financial strategy class, the main book we are discussing is Random Walk on Wall Street. As far as I know, this hasn’t changed for years. I am fortunate that my professor is open minded and allowed me to make a presentation on Trend following. It is always useful to get acquainted with several different perspectives.
March 23rd, 2010 at 9:24 pm
Probably deliberate misdirection. Markets are of 2 types – growing the pie or stealing a piece of someone else’s. Growing the pie takes is what productivity is really about. Stealing pie from others is what financial institutions do with their thinly veiled “innovation”, which is not really producing anything at all. Perpetuating bad ideas just means you can fool a larger section of the crowd when the time comes to “innovate”, and steal with impunity.
March 23rd, 2010 at 9:28 pm
Good post Barry…I think this almost everyday while in class. Not only do I feel that I waste time learning these things, but I have learned more by reading your blog than I have in all my classes combined (through 4 years).
CAPM and the EMT clearly have little use and the only reason it is still taught is because of the cult of academics teaching it and the strict curriculum that accredit business schools must follow. The one finance professor I know of that actually gets it (behavioral finance) is Robert Haugen, who wrote a book the Inefficient Stock Market, which Barry recommends.
Most of my friends in business programs are taught similar material, but I wonder if any schools actually deviate from the norm. My guess is Syracuse University’s Whitman School of Management is doing something right…wish I went there.
I read a James Montier interview the other day and he said that students and investors would be better off reading investing history books about human nature than studying for the CFA. He is right, but unfortunately we live in a society that rewards credentials not common sense. Not that I know much about the CFA, and will probably take it in the future…
March 23rd, 2010 at 9:29 pm
Two memories stand out from my MBA schooling. The first was Finance teachers emphasizing the benefits of generating capital by selling bonds as well as stock so as to leverage up return. This is all fine and dandy, but the risks involved in taking on such debt were never discussed.
Second, the capstone of the program was a simulation where we were assigned into groups to run our own companies. We started with certain assumptions: sales, factory capacity, etc. Each week we were given updated sales figures, economic data and so forth. For nine weeks we could add overtime shifts, add production lines, new plants, export to other markets, etc. by spending our capital. A great concept, but guess what; during the entire 9-week period, sales went straight up as the simulated economy just keep on getting better. The teams that “won” were the ones that spend every last dime on continual expansion. The students were being prepped for a “Goldilocks” world. Is it any wonder we are in trouble?
Luckily, I learned to distrust authority figures back in kindergarten when, on the first day, going over the basics, the teacher told us that it should never be necessary to use more than two sheets of toilet paper.
March 23rd, 2010 at 9:56 pm
I go to the University of Michigan – Dearborn. It’s like the uncultured younger brother who hustles instead of reads when compared to the much more popular UofM – Ann Arbor.
Many of the theories they teach in my financial/economic courses seem incomplete to me. For instance, the efficient market hypothesis claims that our markets will reflect all relevant information. However this does nothing to propagate the idea that what’s really important about information is whose hands it’s in. I think of it more like a weighted-average. In other words, it is entirely possible for very valuable information to be known and yet not be reflected in the markets to the extent that it should be if the people with that information cannot enact a large number of trades on its behalf. The most simple argument against the very foundation of macroeconomics is the existence of hedge funds and their exploitation of arbitrage opportunities. Profs will the counter that all arbitrage opportunities disappear in the long run. But we all know the long run is Keynes’ bitch
A general idea about our economic models is that they do not make the necessary extensions into psychology, sociology, anthropology, etc. Behavioral finance is a much larger force than I think equations and models allude to. If we could understand human behavior we would understand the driving forces of markets, economies, etc, at least on a level we are responsible for. Shiller is the Mandela of the movement, with you (Barry) like a hired gun. But until these ideas are expanded into normal universities, the average finance/econ grad will be too reliant on old (unsuccessful) models and attitudes.
March 23rd, 2010 at 9:58 pm
Sorry BR, the question is both unanswerable in the sense you likely meant it — as in why do we repeat mistakes — and yet rather trivial: To paraphrase an old soldier, a metaphysics never dies, it just fades away; it might happen faster in the physical sciences than it does elsewhere but cultural practice defines the human and no human will readily subtract from themselves unless the cost of sustaining is more than they can bear.
As I’m sure you know, surviving a rigorous graduate program requires more than merely memorizing sources, it is a way of thinking and ways of thinking require assumptions which in turn are grounded in root metaphors: Ontology recapitulates epistemology, eh?
March 23rd, 2010 at 9:58 pm
From a current MBA student graduating in a couple of months…
In our required course on business ethics last Spring, the assistant dean of the program and professor of the class made the following assertions…
1. If a group of people like the bankers crashed into a ditch, wouldn’t the right thing to do is to offer to help them (by bailing them out)?
2. The compensation packages for the bankers are sacrosanct because a contract was signed. And besides, everyone knows that these individuals are as talented as professional sports athletes and rock stars. How would their companies be able to compete for talent if they couldn’t offer competitive compensation packages?
These pieces of wisdom came from the mouth of a man who had made his name working at the Federal Reserve. Never once did he nor any of my MBA classmates bring up the idea that maybe, just maybe, the right thing to do would be to stand the bankers up against a wall and offer them a blindfold and cigarette. Since clearly a group of people who get paid lots of money obviously deserve it and would never act in such a way as to selfishly benefit themselves while destroying everyone else.
March 23rd, 2010 at 10:01 pm
I got the same lesson about debt vs. equity. The professor dismissed any concerns about the risk of debt by stating that if a company were to take on too much debt, the market would recognize this and require higher and higher interest rates until further debt financing became unviable.
The notion that “the market” and the various players might be biased towards issuing debt for their own reasons and that the purchasers of that debt might be the suckers who get fooled was not even considered. Again, “the market” would surely punish financiers, investment bankers and ratings agencies that failed to provide sufficient information…
March 23rd, 2010 at 10:02 pm
Zombie Economics looks like a winner
http://zombiecon.wikidot.com/
1. Introduction
2. The Great Moderation
3. The Efficient Markets Hypothesis
4. Micro-based macro
5. Trickle down
6. Privatization
7. Economics for the 21st Century
March 23rd, 2010 at 10:09 pm
The notion that risk and return should be analyzed separately is probably the single biggest bad idea being perpetuated in academia.
March 23rd, 2010 at 10:16 pm
This university professor — NOT an economist — is teaching institutional economics (Hodgson, et al) and Lindblom’s The Market System this term. More accessible and immediately useful than Marx for my students. Most free market types have never bothered to read Smith closely. If they have read him, they have not read the full body of his work and do not understand him. It is not uncommon for the ideas of European thinkers to move (rightward) as they cross the Atlantic. Most of what passes for mainstream economics is either fiction or fantasy.
March 23rd, 2010 at 10:21 pm
Eric,
I disagree, but for a subtle reason. RISK is generally not taught much you are taught that the risk of any investment is going to be perfectly reflected in the price, because the market is perfect and will appropriately reflect the risk in the return of the project. As was the case with MBS price modeling, the presumption is that you don’t need to do risk analysis, because the perfect market will price it for you.
“Risk” in an MBA program is mostly discussed in terms of Beta, or variability from the market, not the kinds of true accounting risks that we really need to be concerned with.
In fact, I would suggest that the one of The Biggest Lies is “Risk = Beta”.
March 23rd, 2010 at 10:35 pm
I don’t know if it’s taught in schools, but one of the big fallacies is that the American worker can compete with anyone if given a level playing field.
Maybe it’s true, only they neglect to add that the level playing field is below sea level.
March 23rd, 2010 at 10:58 pm
Recent MBA here also a self taught Austrian Economists (sorta) and someone obsessed with LTCM and how that firm failed. I get weird little obsessions that I learn as much as I can about and then never use the information again. Ask me anything about the 1982 Celtics and I know it. Sadly. Anyway my biz school had a finance prof. who I took a bunch of classes with mostly because the school thought he was a rock star but in reality he just had a big ego and a lot of connections to help students – not that he liked/hooked me up. Here’s why: As an accelerated JD/MBA I averaged about 4 hrs of sleep each night while not really caring what people thought of me (great attitude huh). So when he’s setting up a problem and assuming EMH – I asked him “But what if the markets aren’t Efficient?” After about a 2 min discussion he asked me “how many Nobel prizes do you have?” “well the guy who invented this has one so I’ll go with him.” I asked him could he demonstrate this without EMH to which he said “If you don’t want to participate in this class you are free to leave…There’s the door” I should have walked out but I just shut up and sat there.
Either way once academia has their mind made on a certain issue they must defend it. IMHO the time lag between old ideas being shuffled out and the new ones coming in is at least partially due to the vested interested of the people who make money based on their ability to propagate these ideas. Here this prof made his bones explaining the world assuming EMH. If you take that away all of his years of education and experience simply using quantitative analysis to evaluate markets then you are attackin his very being. He will due everything in his power to defend this and if he has power in the hiring process guess who is coming in the door next. Another EMH Prof.
March 23rd, 2010 at 11:09 pm
Tawm I hope you’re right and students of today get it. Its not about making a killing , its about not killing making it and totally absolving yourself of what your company does.
Be an Enron during the week and go to church on Sunday is the business model as I see Wall St. I was never a business student so it took me a long time to understand that “its just business” was a way to say “Its not me throwing you under the bus” but yea it is you and your culture.
You know how they say Fuck You in big business? “Trust me”
I see that some of you business students believe the textbooks they make you study about the efficient market. How many chapters deal with insider deals, frontrunning , cooked books, manipulating the press to move your stocks etc. Thats the real world. The real efficient market is when you can move the market aka Goldman Sachs. Are you guys going to put some old lady’s nest egg in that mud wash and justify it all with a BMW, 2.5 kids and a big house? Thats a tired sterotype , I hope thats not you.
March 23rd, 2010 at 11:22 pm
http://www.huffingtonpost.com/2009/09/07/priceless-how-the-federal_n_278805.html
Priceless: How The Federal Reserve Bought The Economics Profession
By Ryan Grim
“The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.
This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed’s thrall, the economists missed it, too.
“The Fed has a lock on the economics world,” says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. “There is no room for other views, which I guess is why economists got it so wrong.”
yon’ Rosner nails the Problem.
the disinfo fed to ‘Students’ is geared toward Gearing–the Product of ‘Banks’..
March 23rd, 2010 at 11:24 pm
Guild Socialism among academics is a powerful force. No one wants to admit inside the academic club that the ideas don’t work. It is more convenient to ignore “bad” data that makes your theories look wrong. Doing a total retooling of thought is expensive, and what if you get it wrong? Many professors would not adjust their thinking, and would have to be let go. Worse, if you find yourself in the minority, you could be let go.
Paradigm shifts are painful, and men vigorously resist them. So, look at Thomas Kuhn’s Structure of Scientific Revolutions, and apply it to Economics and Finance:
http://en.wikipedia.org/wiki/Structure_of_Scientific_Revolutions
1) Why does MPT still exist?
2) Why do we use normal distributions for hypothesis testing?
3) Why do we bother doing large scale macroeconomic modeling when it doesn’t yield fruitful results?
4) Why do we care about monetary policy that doesn’t care about debt of asset prices?
5) Why are the Modigliani-Miller theorems still taught? How a company is financed is not neutral to the value of the assets.
6) Microeconomics has its own set of issues — people don’t maximize utility, because the effort of maximization is a bad, and they conserve on it. Thinking hurts. So, people and firms go for “good enough.” The math can handle maximization, but can’t handle “good enough.” Why do we bother with the advanced math here? In most tests, human behavior is varied enough that it does not conform to the expectations of neoclassical economics. Math has not helped understanding.
7) I studied to become a development economist. The nations that have developed are the ones that ignored the development economists and followed free markets.
8 ) And more… rational expectations? People don’t work that way, except when conditions are severe. EMH? Useful as a limiting concept, but not as much more.
I could go on… (The errors of Keynes come to mind) I do want to add that the Fed, because of its economists and assets, dominates major areas of economics, and uses that power to reinforce their views of economics, particularly monetary policy.
That is why we are not changing; academic economics would lose from admitting that they have been wrong for many years. So would the Fed. Politicians would lose for a different reason… they could no longer blame economists for their errors.
March 23rd, 2010 at 11:34 pm
All of the things you listed survive because there isn’t a better alternative being laid out.
Markets don’t get prices 100% correct all the time doesn’t mean we should have government bureaucrats determine or influence prices.
People sometimes make stupid choices doesn’t mean they aren’t trying to make smart choices (they just aren’t omniscient).
Also, people sometimes make stupid choices doesn’t mean an authority making choices for them would do a better job.
Cmmon Barry, do better. Your becoming a broken record tilting at strawmen.
March 23rd, 2010 at 11:35 pm
Friedman said nothing of the sort. I saw Milton Friedman speak during my MBA program. He was very concerned about equality and making sure all people were well cared for. Don’t criticize Friedman if you don’t know what he said.
~~~
BR: Was that before or after he proposed getting rid of the Food & Drug Administration, because the market place would self-regulate those who produced tainted foods or dangerous drugs?
March 23rd, 2010 at 11:52 pm
davver – don’t you think there is a difference between deference to the laws of supply and demand and the worship of free markets? In my opinion, our society functions best when our government can minimize negative externalities.
March 24th, 2010 at 12:06 am
I graduated from law school two years ago. We were required to take a class called “Law & Economics.”
The major focus in the class was on the Coase Theorem (http://en.wikipedia.org/wiki/Coase_theorem), which earned Prof. Coase the 1991 Nobel Prize in Economics.
The basics: when transaction costs are low, disputes arising from externalities (pollution, noise, etc) should be settled by contract law (negotiation between the parties), and not by tort law or regulation (a solution imposed by a third party). There’s more there, including an “invariance thesis”, which argues that the initial allocation in property rights is irrelevant if transaction costs are low.
Bottom line: it is all utterly worthless for the 99% of law school graduates who do not become law professors specializing in “Law & Economics.” As a fellow law school grad, I’m sure you will agree.
IMHO, we would have been much better off being required to take a class called “Law & Literature.” I’m sure that reading “Bleak House” by Dickens would have been much more enjoyable (and a better introduction into the profession). Or, in the alternative, being required to take a class in Bankruptcy law.
March 24th, 2010 at 12:08 am
All these ideas persist for so long because the very foundation of economics is based upon an intellectually bankrupt notion that economics is a science, when it simply isn’t.
Economists are some of the biggest frauds in the world. Their ideas are mostly unverifiable, their models have little to no predictive skill and economists are rarely (if ever) called to account for bad ideas, much less exposed as the same level of frauds as circus side-show fortune tellers.
The reason why bad economic ideas are being taught in academia is because if they didn’t teach bad ideas, they’d have very little to teach, probably nowhere near enough credit hours of material to fill a bachelor’s degree, much less a PhD. How are they to achieve tenure and a job for life with that sort of situation?
So they’ll do what many academics do: fill their CV with bullshit.
March 24th, 2010 at 12:09 am
Keynesianism is still dominant. In spite of its prime assumption that gov’t may spend more without capturing a larger portion of the nation’s productive resources, depriving the private sector of the use of those resources. This mistaken belief in free lunches has a very negative effect on the productivity of the society taken it by it.
March 24th, 2010 at 12:39 am
There’s 100s of terrible terrible ideas being taught, but here is my favorite one to hate:
The CML. The first time I was taught the CML I protested that it was idiotic, because if everyone followed the rule, one of us might not move the market, but the collective of us doing the same thing would, ensuring the whole thing fell apart. My teacher said “Save it for next year.” That’s when I decided to work in software engineering instead.
March 24th, 2010 at 12:54 am
Well, I don’t know if this is really what you were getting at, Barry, but the question you posed to the panel is more a psychology question than an economics one.
There are tons of psych studies involving groupthink and poor decision making.
To name a few off the top of my head…in one, the participant sits in a group of people who he believes are subjects too, and they are all making mundane, simple judgements about something really obvious (like which of two lines is longer). Then, as rehearsed, the entire group gives an obviously wrong answer, to see what the subject does. It was about 50-50 whether they responded correctly or with the group.
My favorite one…they bring in a subject, who does something incredibly boring for an hour or so. Then they ask him, for the sake of the experiment, to lie to the next participant, and say that it is really exciting. In case a the offer him an additional 20 dollars to lie, and in case b they offer him an additional 1 dollar. In both cases the subject does the lying, but then when they asked him how much he really liked/didn’t like doing the task, in case a he hated it, in case b he didn’t think it was really all that bad (his responses were statistically significantly less bad). The idea is that in case a, he rationalizes the lying by saying he lied for the money. In case b, he rationalizes his lying by deciding he didn’t hate the experience so much.
There are tons of experiments like that though! Perhaps that helps…
March 24th, 2010 at 1:09 am
I only did a business minor to which I am grateful because judging the degree of groupthink in the markets I tend to think people are collectively being taught bad ideas or something…
March 24th, 2010 at 1:18 am
I graduated from UT in 2008 with my bachelor’s in economics and currently in my first semester of my MBA at UH. Everything you listed and all of the theories you have previously criticized are still being taught. It wasnt until my final semester of undergrad where my international economics professor discussed the fallacies of Ricardo, introduced Heckscher-Ohlin, and Stopler-Samuelson. As you might guess, the textbook for that class was Krugman and Obstfeld. The professor was a big fan on Brad DeLong. Macroeconomic Theory was pretty evenly distributed with Classical vs Keynesian economic thoughts with a touch of Neoclassical and Austrian in the mix. So far this semester in my managerial analysis class we have discussed exchange rate determination, the PPP, Ricardo, market stuctures and such but when I asked about alternatives to Ricardo, like the HOS model, the professor said it would not be covered. The first project was a case study on Chiquita and the protectionist trade policies of the European Community on bananas. The take away was basically tariffs and quotas are bad, and free trade is awesome. The part of this course that bothers me is that so far we have only discussed the general classical theories about markets and their efficiency, but have not and will not discuss things like even the Coase theorem. However, this is not completely indicative of either school’s curriculum as a whole. I have friends who had very different experiences with the same classes but with different professors. UT seems more liberal that UH, and understandably so. They do happen to offer a Marxist Economics course. haha. Reading Capital vol. 1 was like nails on a chalkboard for me so I did not take the course.
March 24th, 2010 at 1:26 am
Homo economicus is a strawman. In most cases it is used as a teaching tool to get across more basic economic ideas, much like the supply and demand curves are there to teach ideas but aren’t of much practical use.
It isnt until you get quite far into economics that you address concepts augmenting the economic man, or rather, ideas that incorporate the more obvious criticisms.
Here is a question for you,
“Why do people insist that homo economicus forms the backbone of economics when it is shown over and over again that it doesnt?”
Economics as a “science” suffers from other people misconceptions. People getting into economics expecting hard science are deluding themselves. Those wanting to apply engineering style certainty to the field of economics are downright dangerous. Again, mathematics is best used to explain economic concepts, NOT calculate outcomes.
The cricitism that “economics isnt a science” is, again, criticising the field for not doing something it isnt supposed to do. X on the MTA above shows precisely what I am talking about. There is someone who left economics to get into engineering. They were frustrated that economics didnt have nice and correct answers to the questions posed. Or rather, that the nice and correct answers required unpractical assumptions and only worked in a strictly restricted world. The question is, how many people are like that? How many people get into economics thinking it is one thing, find that it isnt, dismiss it because it didnt meet their expectations, and then call the entire field a failure! When the only real failure was the individuals initial expectations.
Slighting “deregulation” as a movement is robbing the concept of all nuance. Few economists argue that deregulation is inherently and always good. But that seems to be exactly the accusation of those wanting to tear economics down. Once again, you are ridiculing economics for what you percieve it to be, not what it is.
And it is called efficient market HYPOTHESIS. Please dont elevate it to the level of a theory. That just reveals your own scientific ignorance, ironically calling into question your ability to decry economics as a science.
BR, did you think you were asking a simple question? One with a nicely rounded cookie cutter answer?
The question of why human beings continue to believe something is true even after it is proven false could be the subject of a couple of dozen PHD theses.
March 24th, 2010 at 1:42 am
What is taught is school needs to address on how to invest other people’s money ie pension and retirement funds. This teaching is believed to be basic on the greater good ie risk management. Newer books such as ‘Far From Random’ or ‘Market Indicators’ are for fools like myself who think that the risk management school of thought is a bit too safe. That being said I would never invest other people’s money nor do I think I should be allowed to.
March 24th, 2010 at 2:10 am
When I was a young financial analyst (a couple years ago) I had a helluva time convincing management (and other financial analysts) that it was a myth that overtime was cheaper than hiring. No one figures in the cost of accidents by fried workers busting their asses (literally) to meet ever higher productivity demands. (Since I retired as soon as I could from beating my head against the wall on that one I have no idea what these current major productivity increases are doing to accident rates–if anyone dares report one now.) And no economist would back me up that the societal cost of transfer payments to the unemployed should also be factored into the hiring equations. (I got called a Communist for that one. Go figure.)
Lip service to safety first. Assholes.
Same with daylight running lights on fleets. Once a year I suggested that to the glazed over looks denying the positive euro experience with mandatory day-lights. What do finance guys know about Safety? That’s the trouble. Someone capitalizes Safety, leaves the rank and file out, and it becomes another white collar paper pushing bureaucracy.
Bad ideas are Newtonian. Orbiting unimpeded through boardrooms and conference rooms until acted upon by the desperate for a clue. Good ideas are Quantum–colliding with the open mind and energizing it.
~m
March 24th, 2010 at 2:41 am
So when a manager is looking to hire someone, he should factor in the decrease in costs to society by removing someone from the unemployment benefit?
He should internalise a cost to generate a positive externality? Just considering the manager himself, he should increase his costs in order to eliminate the tiny cost to him of one more person on the unemployment benefit.
He is to replace a tiny cost with a larger one.
That is not an argument I think you can ever win.
March 24th, 2010 at 3:29 am
Why smart people defend bad ideas
By Scott Berkun, April 2005
http://www.scottberkun.com/essays/40-why-smart-people-defend-bad-ideas/
March 24th, 2010 at 3:34 am
Most of the time, wrong-headed economic ideas are put forth in order to protect the guilty. David Stockman admitted that he invented supply-side economics to make the rich rich and poor poorer, not stimulate the economy. To cite a current example, European Prime Ministers are pointing the finger at hedge funds for the crisis in Greece, to misdirect blame from the bankers and politicians who created the problem. The banks could ease the terms (if they weren’t insolvent), but why should they when the EU or IMF (U.S.) may bail Greece out?
This is a game that gives and gives, as one “failed” country after another could be bailed out using the IMF, bankrolled by the U.S. Why would europeans want the truth to be known, when they may have found a way to help themselves to the U.S. treasury for billions (or trillions)? Recall that at his first G-20 meeting, Geithner demanded we “give” the IMF $2 trillion dollars! Why would Geithner want the public to figure out that he and Paulson have been lavishing public money on bankers?
When that much money can be taken by a single man, speaking just a few words of obsfucation, we can expect to hear any number of reasons except the truth. Those who do speak the truth may be villainized, as is happening now to Hugh Hendry over Greece’s situation. Years pass, and politicians stick to their stories like crazy men, even in the light of new evidence. They fear prison. They claim they got bad advice, or that “no one could have predicted it,” even though people predicted it throughout.
Why are people unable to distinguish good ideas from bad? You only need to fool some of the people some of the time to make off with trillions.
March 24th, 2010 at 4:18 am
I lament that there is not more Socratic method in schools or business. I actually use it alot in my work… and this post is a good Socratic one -
1. Why is it that most of us will be mediocre? Mediocre in our portfolio returns. Mediocre in our understanding of concepts, our comments, and our intellectual contributions. Can we accept that?
2. Why is it that most of us over generalize and are subject to sheep-like behavior? (“Let’s de-regulate!”, “Houses will never decline in price”, “Down with Wall Street”, “To hell with these sinners, witches, slaves, jews, …”)
3. Why is it that people LOVE to believe in grand IDIOTIC conspiracy theories? (911 Truthers, Birthers, JFK and the grassy knoll, Rapture, Masons, etc)
These very basic human frailties are at play in bad “populist” politics and in bad academic works (communism, beta) and bad portfolio choices.
March 24th, 2010 at 5:09 am
I have to totally agree with this from davver:
“All of the things you listed survive because there isn’t a better alternative being laid out.
Markets don’t get prices 100% correct all the time doesn’t mean we should have government bureaucrats determine or influence prices.
People sometimes make stupid choices doesn’t mean they aren’t trying to make smart choices (they just aren’t omniscient).
Also, people sometimes make stupid choices doesn’t mean an authority making choices for them would do a better job.”
Only because a market was “deregulated” it did not mean it was “free”, but rather it was easier to install institutionalized control fraud of the type Bill Black discusses.
March 24th, 2010 at 5:23 am
Well Barry, it is a long story, but the main thing is that many economic theories rely on invalid assumptions. Thus, “Modern Portfolio Theory”, the “Efficient Market Hypotheses”, “Perfect Knowledge”, etc. continue to be taught. What is needed is a course in why these constructs are all wrong so that the PhD canadates can work on new constructs that will eventually lead to a new understanding. Presently a lot of students are led by Central Bank Money to pursue thesis topics that will not lead to a true expansion of knowledge. Not only is the “financial game” rigged but also the” academic game” which is tasked with creating NEW knowledge.
March 24th, 2010 at 5:34 am
Combination of things:
Short termism, people are largely only interested in the now, if people don’t see positive immediate payoff of a change in thinking or an immediate negative impact of not changing it will not be a priority.
This attitude often being combined with a general dislike towards change, the similar notion of rocking the boat and peer pressure.
It is also a question of understanding, do the people who are affected by the idea understand all the variables, people like simple ideas that seem self evident.
The longer an idea has been around the more resistance to change, especially when you get parts of the population that have been borne into and grown up with said ideas, example: a given religion/political system/monetary system/cultural behavior.
March 24th, 2010 at 5:52 am
@cognos is your point 3 not an example of part of your point 2? To simply paint a theory/idea as idiotic because it involves conspiracy. Perhaps if people where more open to ideas instead of simply lambasting them by association.
March 24th, 2010 at 6:22 am
Passion is powerfull. And you gotta follow the money. If you disagree with a generally accepted idea, there’s no money in it, thus, you go elsewhere for whatever reason. And there’s money in believing in the idea, right wrong or indifferent.
It ends up being an cyclical re-inforcement. The opposition is always there, yet, they change constatnly, and the idea folks see positive results for there actions, thus, they become more entrenched.
It’s still the trend is your friend
March 24th, 2010 at 6:32 am
“Why do Bad Ideas seems to persist for so long? How do certain concepts hang around, long after they have been disproven?”
Part of the answer probably is that we´re irrational and furthermore we keep making the same mistakes over and over again. Why? Because we have difficulty changing our behaviour, we think a decision is rational and have a problem seeing it actually is irrational and systematic. Dan Ariely´s book Predictably Irrational is recommended reading on this topic. For an example he uses some experiment to show that when people get an “anchor” they keep valuing a price relative to the anchor, regardless of new information that should make them value it otherwise. If we were rational we would be able to assess new information and get rid of concepts that are disproven.
http://www.amazon.com/Predictably-Irrational-Decisions-Revised-Expanded/dp/B002D1OSNY/ref=sr_1_3?ie=UTF8&s=books&qid=1269426041&sr=8-3
March 24th, 2010 at 7:21 am
“Why do Bad Ideas seems to persist for so long? How do certain concepts hang around, long after they have been disproven?”
The bad ideas persist, not because of a void of more relevant thought, but because of the University system that firmly entrenches old thought in permanent positions via tenure. The university culture is vastly different than the private world–and probably always will be. The only thing that will save us is mortality and that the past couple years have produced enough fodder for new thought and new leaders to emerge from the ashes.
Sadly, we are at the point where the entrenched still espouse that the world is flat despite it being firmly established that it isn’t… Reading some of the other comments it gives me a little hope that instructors at some places are allowing students to wander off the path of CAPM, efficient markets, etc… and bring to class some of the more modern thinking… This seems like a good first step. Now if we can get rid of all the Ayn Rand acolytes… What a concept…it’s like giving a teenager the keys to a fast car, a full liquor cabinet, a loud stereo, a huge party house, and then saying; “now don’t get into trouble…” Might as well light the match on that one…
March 24th, 2010 at 7:52 am
Although I am not in school the CFA program continues to use the EMH as part of its learning outcomes.
However, they do have a smidgen of behavioral finance.
But why do bad ideas seem to persist for so long? IMHO is partly due to cognitive dissonance. The best analogy would be similar to victims of Ponzi schemes who refuse to believe that they were taken for a ride.
March 24th, 2010 at 7:53 am
“The reason why bad economic ideas are being taught in academia is because if they didn’t teach bad ideas, they’d have very little to teach, probably nowhere near enough credit hours of material to fill a bachelor’s degree, much less a PhD. How are they to achieve tenure and a job for life with that sort of situation?”
-dsawy
Although a tad cynical, I think this hits the nail on the head for the majority of situations. I would like to call it something like “institutional inertia” or something similar. It would be useful if we knew how many people in academia were “true believers” and how many simply knew where their bread was buttered.
March 24th, 2010 at 8:17 am
They are teaching Keynes not Austrian.
Common sense is negated after kids spend 15 of their most impressionable years believing that the person behind the desk is always right and always knows something they don’t.
Once something gets ingrained in society it is hard to splinter – flat earth.
March 24th, 2010 at 8:41 am
In general, old professors hold on to old ideas. I had a few professors in grad school that taught the same subject material as they did 30 years ago. These professors were tenured so they were untouchable.
Fortunately, my grad school, The Citadel, had many wonderful, open-minded, philosophical professors that guided students to think for themselves and that self-knowledge is more important than any other.
“Education is an admirable thing, but it is well to remember from time to time that nothing that is worth knowing can be taught.” ~ Oscar Wilde
March 24th, 2010 at 9:01 am
Can’t believe Dr. Jim Kramer & Dr. Larry Kudlow wasn’t on the panel.
March 24th, 2010 at 9:15 am
What I learned in MBA Strategy class is that there is no business problem so complex it can’t be resolved within the context and timeframe of a three hour lecture.
March 24th, 2010 at 9:22 am
My favorite bad idea is that your stocks/bonds allocation must depend on your age and not on the market conditions at that time.
March 24th, 2010 at 9:31 am
As to why we bad ideas persist, I think speaks to the “herd”. Humans are of the “pack animal” variety, I believe, and that makes us want to conform. It has its advantages and has led us to evolve beyond our fellow primates (unless you don’t believe in evolution, then this is not for you).
Conforming is a strong drive and believing and supporting non-conforming ideas leads to both unpleasant criticism and self-doubt (part of our make-up that helps keep the herd/pack together). So bad ideas once pushed into the culture remain, stubborbly. And we see it on the left and right, politially as well, of course.
As an Engineering undergrad I went back and got my Masters in Business in ’96 (@ BU) – during the internet wonder years. Total unfettered free markets was the underlying assumption though not hammered into us. There was no reason at the time for any other thoughts.
March 24th, 2010 at 9:58 am
Barry, it always comes back to Richard Feynman and his classic take on “cargo cult science”:
http://calteches.library.caltech.edu/51/2/CargoCult.pdf
March 24th, 2010 at 10:22 am
I don’t think that CAPM, EMH, DDM and other valuation methods should be stripped from the curriculum. They are actually reasonable ways at trying to get a handle on how the world works, especially when taught to people who have never had a framework to think about how to go about making investment decisions.
But I think a lot of us in society are just intellectually lazy, and the “make a quick buck” crowd are especially attracted to finance, and so they decide that “reasonable” means “completely accurate.” A lot of these theories are the first approximation to how to value something, and they aren’t half bad as a first approximation. But with so much competition in the markets, you have to go BEYOND that, to figure out what adjustments the second and third approximations are going to add. But lots of students (and many professors) just don’t feel like putting in the effort to do that, leading to groupthink, and the “let’s blame crappy professors for not teaching us the right stuff.”
You have to walk before you run; crawl before you can walk. The EMH was never meant to assert true reality – it was created to make a set of assumptions work and make the mathematics of a model tractable. It does make sense to suggest that, whether or not it is possible to beat the market, it is certainly difficult to do so, and that is a valuable lesson. But it doesn’t make sense to go into all the ways that the market is not efficient without going through why it might well be mostly efficient. Without learning one, you can’t elaborate on the other.
I also think there is a big problem with the fact that there is quantitative information that you can work on with mathematics, and then there is qualitative information that you can’t. Somehow the quantitative information gets prioritized as “better” or often even thought of as “better thinking,” but this just tends to devalue the idea of looking at stuff like power differentials, market power, monopolies of information, corruption, and all that stuff that we KNOW is important to consider. But since it’s hard to quantify, many of us just pretend it isn’t there.
March 24th, 2010 at 10:22 am
[...] | Posted by Chill on 24 Mar 2010 at 10:22 am | Why do bad ideas in economics persist for so long? [...]
March 24th, 2010 at 10:25 am
We studied the usual suspects in my graduate finance courses (CAPM, EMH, etc.). However, after studying CAPM for a few sessions in my securities class, my professor simply stated that the CAPM is crap. After repeating this a few times, he went on to explain why. It was refreshing. I felt that many of my finance classes reduced the complexities of the real world to formulaic modeling. It seemed too simplistic and contrary to thoughtful analysis!
March 24th, 2010 at 11:00 am
Check this out Barry…it’s a good one
http://www.leggmason.com/individualinvestors/documents/insights/D8618-Mauboussin_SeeForYourself.pdf
March 24th, 2010 at 11:06 am
Look, to all the clowns out there who think that some obscure theory at the University of Chicago caused the damn bubble – you are out of your simple minds.
The Efficient Market Theory has no draw over a human caught in a feeding frenzy of greed. How many people who bought Quallcomm in the late 90′s read Fama’s work?
Fama wasn’t even born during the Tulip craze, or the many that happened since, and will happen in the future.
As many posters have noted. Humans are humans. Make simple enforceable laws, and let people play their cards.
A de facto command economy is a far worse than gunslinger capitalism. Even if the beneficient dictator can win on pragmatic grounds, I will take the shortcomings of free and open society everyday.
You can’t legislate morality. We have to organically reinstall that concept, as we feel the consequences of our mistakes – good morality is good business, this will shown.
Look, 3000 years of history shows that those IN charge routinely abuse those NOT IN charge, and yet some still seek to install newer, smarter people to rule them, as if that would change something….
Bad ideas stay around for a while because we are human, not because of old white guys drawing charts in Graduate school.
March 24th, 2010 at 11:20 am
The Efficient Market Theory has no draw over a human caught in a feeding frenzy of greed. How many people who bought Quallcomm in the late 90’s read Fama’s work?
@scharfy: You are missing the point. EMH was an important ideological fig leaf for advancing the radical de-regulation agenda.
March 24th, 2010 at 11:35 am
I tuned out when I realized that none of these stodgy old men knew what they were talking about, yet could not tolerate disagreement. Economics is far more an art than a science…too inexact to be the latter, yet they use math to hide behind what they can’t understand. Understanding which factors (and, in many cases, “school”) prevail at the moment and knowing how to weight them seems to be a lost art. And, if these professors didn’t know…
You can always spot the Ivy Leaguers by the way they profess themselves “Capitalists” with the brio of a “Christian”- i.e., not exactly sure why (I guess their professors were even more sure of themselves than the ones I suffered). A fun game: Jedi mind trick; agrue in support of EMH, but leave bait for them for disprove you…and watch the internal conflict ensue.
Actually, Jedi mind trick may be giving them too much credit…more like Bugs and Daffy.
*disclosure of the obvious: Bokolis didn’t go to an Ivy League school. I showed up to Columbia with a letter and a check, took a look at the stiffs (students AND faculty) around me and walked thefcuk back to the subway.
March 24th, 2010 at 11:42 am
shee-it, QCOM made me enough money to put off facing the world for 3 years. I was a dumb boy, but somehow always knew when enough was enough. On the back side of that fig leaf, it surely read, “Never underestimate the other guy’s greed.” Obviously, we didn’t have administrators or legislators “efficient” enough to lift up the leaf.
March 24th, 2010 at 12:32 pm
I’m not an economist or anything close, just a farmer. I say keeping discredited ideas going is as much a political issue as an issue of what professors teach.
A lot of bad ideas survive because of the wealth and power behind keeping the ideas going. I think the transfer of power to the rich is supported by a whole network of TV and radio. These people (as in corporations, politicians and Wall Street) have the power (money) and control of mass communications. They will not give power/wealth up easily. They have entire broadcast systems to support the ideas that give them power and wealth.
So if EMH/deregulation makes it easier for them to get rich, they will use everything in their power to keep beating concepts (government is bad, regulations are bad, trickle down, supply side economics, less taxes etc) that make it almost certain that they will get very rich. They will use the power they have, social wedge issues,fear, slander and anything else to further their agenda. What is taught in universities is probably of little importance as long as it is believed (in some form) by a majority or even a significant part of the populace.
Now back to farming.
March 24th, 2010 at 1:00 pm
I’m not an academic but I’ve observed that people believe whatever will fulfill their needs. If they need to be accepted by the prevailing culture, they will adopt its beliefs and defend it from criticism. People who have been taught to obey authority will not challenge its leaders, even when they know the leaders are wrong, because they need acceptance. (Milgrim) Authoritarian leaders will ignore immoral or just incorrect behavior if it helps them maintain dominance, holding themselves above the law. (Altemeyer) And these needs go very far back to childhood, where so many of our elite were told that they were better than everyone else, and therefore they do not question themselves or see the need for independent verification of what they believe.
March 24th, 2010 at 1:05 pm
This question seems to be brushing close to the idea that truly novel and revolutionary ideas (in the physical sciences) require two generations to be fully embraced. If I remember correctly, the rationale was because the old guard had to die off, the next generation could straddle and the 2nd never was taught by the old guard at all. (Wish I could remember the source.)
But consider that was the physical sciences where a hypothesis can be tested and falsified, despite any pre-existing “givens.” In econ/finance, that’s barely true in a lot of cases (near as I can tell) and then there’s also the problem of philosophical/political dogma making it even more difficult to bring more accurate ideas/models to the front. It could take much much longer to embrace new ideas when a lot of economists can’t even seem to agree on the objectivity of the data to begin with!
March 24th, 2010 at 1:06 pm
Remember – most professors have never run a business. They have never had a bad nights sleep worrying about making payroll.
Great CEO article in NYT recently -Someone commmented about how happy his emmployees were – and suggested that he must treat them very well. His answer – ‘that is half of it – the other half is I fired all the unhappy people’.
That type of practical thinking doesn’t come from professors…
Gordo
March 24th, 2010 at 1:37 pm
Frank Partnoy is my professor for Corporate Finance at USD Law. He spoke at the same conference as you, Barry. It’s a law school class so he teaches “Corporate Finance” with a legal and regulatory twist. Mostly, he shows us why certain things are bull shit, like numbers on a balance sheet of a financial firm along with a few other things (my explanation did not do Partnoy justice, it’s a great class). It’s a law school course and most law school students did their math requirement in Undergrad and haven’t looked at numbers since, so it’s at a slow pace.
With law school it’s not so much what are they teaching, it’s what they aren’t teaching. In my white collar crime class we read all these cases about racketeering and wire fraud and political corruption, but my question is “why not use real time examples?”
If I were a professor I would assign the Lehman Bankruptcy report as my textbook for Corporations, Securities, White Collar Crime, etc. I would pull up the AIG/Geithner/Goldman reports and go digging for facts and legal ways to go after … anyone!
The SEC and the US Attorney’s office is NEVER going to catch the real Wall Street criminals if we keep pumping out prosecutors that learned fraud from decades old examples.
I have a friend interning at the SEC right now and we battle all the time over how innumerate they are. I always ask, “how much understanding of financial models do you have?” Or “are you guys looking for fraud (misrepresentations) in the variables of formulas on an excel spreadsheet?”
I ask about if they understand financial markets and how they can be abused. The response is “X has a degree in economics and understands markets.” It’s a real mess. How are these guys going to catch stuff like flash trading and off balance sheet transactions if they don’t understand it?
They attorney’s are flipping through 10-Ks and prospectuses looking for …? They are more apt to going after hedge funds (Read: David Einhorn) for calling out companies by shorting them and publicly ridiculing their business practices. That is simply easier for them to do because a case can be made about a guy that says “I’m shorting Lehman, their books are lying” and then he profits off of the stock falling.
Oh, and I should add, I chose to go to law school versus business school because I did Business Admin (finance concentration) in Undergrad and saw immediately how pointless/useless that stuff is WITH THE EXCEPTION that it is important to understand how the masses are evaluating things.
ALL of my finance knowledge has been from reading blogs like The Big Picture, following the main stream financial press, working at a brokerage firm through the financial crisis (as an associate, not FA), studying for the CFA, and most importantly of all, trading my own account (my hard earned money and some of my student loan money).
Why do bad ideas persist? Because bad ideas are easy to understand, agree with, and perpetuate. Deregulate is easy to say. Cut taxes are easy to do. Deficit spend is easy. Understanding the complexities of a global financial market and democratic governments relationship with those markets is fucking hard.
March 24th, 2010 at 2:07 pm
BR,
“Why do Bad Ideas seems to persist for so long? How do certain concepts hang around, long after they have been dis-proven?”
Because, “Most people cannot accept uncertainty and they have a strong emotional need to be right. They hang onto losing positions/ideas.”
The market validates this every day.
March 24th, 2010 at 3:00 pm
Bad ideas persist for as long as someone can convince someone else it’s a good idea and make money out of it.
March 24th, 2010 at 3:07 pm
BR, not sure why bad ideas linger after they’ve been disproved, but it might have something to do with this:
http://www.miamiherald.com/2010/02/21/1492484/facts-no-longer-mean-what-they.html [My Cliff's Notes summary: Facts no longer settle arguments. A significant number of Americans have become so irrationally partisan, so intellectually lazy, and/or so defiantly hypocritical, that they simply "choose" not to believe evidence that contradicts our opinions. In effect, they say, "You keep on believing your facts, and I'll keep on believing mine."]
I’m not saying all of us are like that – definitely not. But I seem to notice it more and more.
As for bad ideas, I don’t think anyone has mentioned the Laffer Curve yet. One of my B-school econ professors undressed this hypothesis for us mathematically, in quite persuasive fashion (to me anyway). I can’t do his lecture justice, but this essay seems to capture the essence:
http://finance.yahoo.com/expert/article/economist/4065
March 24th, 2010 at 6:21 pm
This is my first time on this blog and I am floored at the quality of the responses! I think the most dangerous item from a policy perspective, as several of the commenters observed, is supply side economics, particularly the idea that tax cuts increase government revenue / shrink deficits.
No matter how many studies or articles you show conservatives that tax cuts increase deficits (CBO, Treasury, CBPP, Mankiw, Factcheck.org, etc) they will just ignore the facts, as if tax cuts are a religious conviction.
It is difficult to have a rational policy discussion with someone that is acting on faith. I think that is one of the reasons why the modern Republican party (tax cuts, big defense spending, small entitlements) is on its way to the dustbin. In the end, if facts don’t support your argument, you will lose in the public square. But those making a fact based argument have to be disciplined in their argument.
March 24th, 2010 at 6:23 pm
I think one other critical point was made by several commenters that people believe what they want to believe and seek out information that supports their worldview. The bad ideas are perpetuated because folks believed them when they were initially taught and its hard work to reset a human brain.
March 24th, 2010 at 6:28 pm
Thanks to lucky timing, I left a syndicated loan desk in the Fall for 2008 for a graduate program in economics. I am glad I left the big bad bank, but if I had it to do over again, I would have gone back to school in another field. After two years, I am defecting econ for a Ph.D. in sociology or computer simulation (much more closely related than most would think).
My program was very traditional in its support of conventional macroeconomic models and things like the EMH. In the Fall of 2008, we were learning from bland macro and micro curricula as the larger world was changing all around us. The only thing we were largely insulated from was enthusiasm for deregulation. Our program gave us a lot of exposure to current and former Fed executives, and the messages we received were largely uncertain. I was ready to quit after my first semester, thinking of the experience as a waste of time and career, but I was talked out of leaving, and am glad for it.
In any field, there is a large gap between the ivory tower and the office floor, but I felt that I lost a great opportunity in my graduate education because the lag prevented us from seriously acknowledging and examining current events.
What I am taking away from my time back in school is a valuable education in econometrics and statistics, which will likely be beneficial regardless of what I choose to do. I feel lucky that I enrolled in a program with a quantitative focus, and the knowledge I gained makes the degree worth the substantial sacrifices.
March 24th, 2010 at 6:49 pm
I think the idea that free markets can self-regulate effectively is another concept for the dustbin. Control systems, no matter how well thought-out, can easly be compromised by conflicts of interest and badly designed incentives. If no government regulator backed by legal authority can step in and address these conflicts, the system is bound to fail at some point.
Just consider the credit rating agencies in the latest debacle. Or the crazy compensation for CEO’s that destroyed their companies and yet kept the hundreds of millions they were paid. Credit rating agencies are very conflicted by their compensation model, which allows purchasers of ratings to “ratings shop” one firm against another. If rating agencies had rated CDO’s as speculative instead of investment grade, this crisis would not have happened. There were enormous economic pressures on these firms to inflate ratings; it is no wonder they eventually assumed that housing prices would only go up.
Big bets with borrowed money at the big five investment banks was another key problem. Why were those bets made? There are rampant incentive problems with executive compensation (huge golden parachutes no matter how incompetent the executives are). If you get a huge payout for taking huge risks, whether the bet goes well or poorly, a rational person will take those risks. The Wall St. CEO’s at the investment banks got HUNDREDS of millions of dollars to go away. Amazing.
March 24th, 2010 at 6:57 pm
Barry, great question. Here’s my take:
Simply put, bad ideas stick around because they are ideas.
By this I mean that they are illusory, abstract, complex, and buffeted from reality by their very natures. and usually taught/perpetuated in school. Often knowledge is sought by analyzing, describing, narrating phenomena, experience, or actions – by turning actions into words. When it comes to economics, this is especially dangerous, and most prone to happen. Many have a vested interest in the words (teachers, politicians), and a fear of action. The actions of others, when not proscribed or even described, are threatening to many. Many of the powerful like bad ideas for these reasons. The founders understood these principles. The economist Ludwig von Mises understood these principles. Read his masterpiece “Human Action”. Also read, “Subjectivity is Truth”, which is in Soren Kierkegaard’s “Concluding Unscientific Postscript”.
Keep up the great work.
March 24th, 2010 at 8:01 pm
[...] Last night, I published this blog’s 13,000th post. [...]
March 24th, 2010 at 10:14 pm
“Why do bad ideas persist for so long?”
Short answer: because we want them to?
Maybe the reason why the panel’s answers were unsatisfactory to you, Barry, is that you were not really asking them a business/economics question, and it made them uncomfortable. That question is really about human nature, it’s a philosophical question, or even a theological one, if you will, and nobody wants to go there, do they? Something that helped me in this area was reading the introductory chapters of Luigi Giusanni’s “The Religious Sense,” a book that I think all financial advisers ought to read. If they really understood his distinction between “ideology” and “inquiry”, who knows, maybe we could have avoided this mess …
March 24th, 2010 at 10:44 pm
I spent the 2007-08 year as a first year student in a PhD Finance program at University of Wisconsin. All the classes I took were in the econ department for the first year; I was basically a first-year econ student.
The core faith of the program is Rational Expecatations (or homo economicus) and Gaussian distributions of all economic phenomena. “Faith” is an appropriate description, as the professors will not & cannot provide any empirical evidence to back up their cherished theories; asking for practical examples of the theory would generate a defensive, angry reaction. It is more akin to religious beliefs than a scientific study. I am not sure how it devolped, but this inability to honestly compare the theoretical faith to economic reality allows the bad ideas to persist; the truly successful PhD has no idea there is even a conflict!
March 25th, 2010 at 6:57 am
Bad ideas, especially in finance, are not bad for everyone – just mostly everyone. Look at the guys who made millions at Lehman, AIG, Bear, WaMu. The guys who had no education, but could make millions pitching garbage mortgages. When there is a large rent to be gained from an idea, those who are getting the rent will defend the idea, especially when their income options are limited.
March 25th, 2010 at 6:35 pm
Shadowfax, two points.
1. Tax cuts do not cause deficits. Spending does. Government spending also crowds out private spending, so there is justification for lower taxes along with lower government spending. I think you will find that the people calling for tax cuts, very often, will also be calling for lower spending.
2. The impact of a failure of a government regulator is much worse than the failure of self regulation. This doesnt mean that there is no place for government regulation, I am just pointing out that the risks of it are often dismissed out of hand. You even say that control systems, no matter how well thought out, will be gamed. Well durrrrr. But you seem to think that a designed control system doesnt suffer from this flaw.
Jeff, you are falling into the trap I described above. You think that economic theories should be testable just like the physical sciences. That every economic idea should be easily observable or testable. But economics deals with an infinitely complex system. Testing is often impossible, and observation is often far too noisy to be of much use.
Homo economicus is a straw man as described in a couple of places above, and the assumption of Gaussian distribution is far from a core faith. It may be all that you saw in your one year of economic study but that doesnt mean much.
You went into econ 101 with a preconceived notion of what the field was. When the reality didnt match up with that notion you called the reality flawed! And the hilarious irony is that this is exactly what you complain about economists doing!
It is quite funny how many of you guys sit at your computers dismissing economic ideas, comfortably smug in your inexcuseable ignorant misunderstanding of them.