Posts filed under “Really, really bad calls”

Letter from Chicago: F

In a post yesterday, my west coast pal Paul discusses how the Chicago School of Economics Circling the Theoretical Drain:

“In the current issue of the New Yorker there is an alternatively depressing and fascinating piece (Letter from Chicago) by John Cassidy about how the Chicago School of economics – monetarism, rational expectations, efficient market theory, etc. – is circling the theoretical drain. While some economists are abandoning the faith, many are not, and the result is, as Cassidy says, much like what happened in cosmology with Edwin Hubble discovered the expanding universe: Economists have lost their footing and are engaged in everything from rear-guard actions to active peer denunciations, and pretty much everything in between.”

It reminded me of an amusing but true tale of Economics from College. When I started my undergraduate work, I was a double major in Applied Mathematics & Physics. Both disciplines are based upon building blocks of logic, reason, and discipline. All subsequent course work is to a large degree premised upon what came before.

The math/science majors meant that I was obligated to take humanities and other (non-science) course work. So I signed up for (amongst other courses) Economics 101.

It took all of ten minutes into the first class for me to recoil in horror. I asked the prof: “What do you meant that humans are rational? That is obviously not true. How important is this idea to economics?”

The response was, in hindsight, not a surprise: “It is the fundamental building block for all of economics. If you fight that underlying concept, if you do not provisionally accept that premise, you will not be able to understand what comes later.”

So I made what turned out to be one of my very best academic decisions: I gathered my books and walked out the door, and dropped the class.

I am curious if anyone else had similar experiences, either in grad school or under-gradauate work.

~~~

Why is the Chicago School of Economics such an intellectually bankrupt line of thinking? It represents two major cognitive errors: First, it attempts to be an all-encompassing ideology, one that tries to explain much of economics via its fundamental constructs.

As history has shown us all too many times, most such ideologies eventually collapse under their own weight. Rather than recognize their own shortcomings and failures, these ideologies rationalize away stubborn facts. EMH does not permit consistent out-performance by managers, so it therefore comes up with half-assed reasons why Jim Simons, George Soros, John Paulson, Steve Cohen have not trounced the averages over their career. “Must be dumb luck” they dumbly rationalize.

Second, it was based on a rather silly and thoroughly disproven notion: That Humans are rational. Everything that follows is therefore premised upon a terribly faulty foundation. How on earth could that edifice come tumbling down?

If you are presently an undergraduate, and you are being taught by someone who believes in the Chicago School, run don’t walk to the registrar and switch to a different econ professor. It is the intellectual equivalent of a tenured Astronomy professor still teaching the Earth is flat following Ptolemy.

I have yet to determine which is worse: A bad ideology, or any ideology at all. . .

>

Previously:
RIP Chicago School of Economics: 1976-2008 (December 23rd, 2008)

http://www.ritholtz.com/blog/2008/12/chicago-repudiation/

How Economists Got It Wrong (September 6th, 2009)

http://www.ritholtz.com/blog/2009/09/how-economists-got-it-wrong/

Read It Here First: “What Good Are Economists?” (April 25th, 2009)

http://www.ritholtz.com/blog/2009/04/read-it-here-first-what-good-are-economists/

Category: Psychology, Really, really bad calls

Statistics: Scientific Consensus on Climate Change?

One of the memes I’ve heard recently in the climate debate is that there is no scientific consensus — that there is actually strong disagreement. The main basis of this argument is that 31,486 dissenting scientists have signed a petition against the belief that Global Warming is man made at the PetitionProject.org. I don’t want…Read More

Category: Mathematics, Really, really bad calls, Science

Stiglitz: 6 Harsh lessons We Failed to Learn

Economics Nobel laureate and Columbia University professor Joseph E. Stiglitz has what very well be the best year end piece I have seen to date; “The best that can be said for 2009 is that it could have been worse, that we pulled back from the precipice on which we seemed to be perched in…Read More

Category: Bailouts, Politics, Really, really bad calls, Regulation

Luskin: Buy Stocks, Buy Citi (11/07) Sell Stocks (3/09)

Invictus is a bulge bracket asset manager with $100+ million AUM. He has no patience for money losers, hacks, partisans pretending to be financial analysts . . .  this is the first in a series of critical looks at analysts, media, economists, financial TV. Feel free to share any thoughts in comments. Here’s Invictus: ~~~…Read More

Category: Analysts, Media, Really, really bad calls, Research

Morgan Stanley’s Commercial Jingle Mail

Here is a fascinating twist on the underwater homeowner walking away fromt heir bad purchases: This time, its Morgan Stanley. They spent over $8 billion on commercial property in 2007 — the peak of commercial real estate in the US.  Now, they are going to preemptively “Walk Away” from five San Francisco office buildings, letting…Read More

Category: Bailouts, Credit, Real Estate, Really, really bad calls

Why Obama’s Poll Numbers Are Plummetting

The political buzz today is all about the President’s falling approval ratings. He has now fallen faster than President Bush did (prior to 09/11). The simple solution for the White House: Stop jerking around with Financial Reform. When there is high unemployment, people don’t want to see bailed out bankers making a killing. Fix what…Read More

Category: Politics, Really, really bad calls

THE TIGER (with apologies to William Blake)

A hedge fund manager in Tokyo sends this along: > Tiger, Tiger bonking bright in the fleshpots of the night what immortal eye or hand could restore your tarnished brand? On what porn star’s breasts and thighs, burnt the fire of your eyes on what course did your ball run as you sunk a hole in one? You always looked…Read More

Category: Humor, Really, really bad calls

Volcker’s anti-Geithner, anti-Summers World Tour

“Bankers and regulators have not come anywhere close to responding with necessary vigor” to the worst economic crisis in 70 years. There is a lot of evidence that financial weaknesses brought us to the brink of a great depression . . . The proposed changes are like a dimple.” -Paul A. Volcker, Dec. 8. at…Read More

Category: Bailouts, Credit, Really, really bad calls, Regulation

The Folly Of Economic Forecasts

> Interesting discussion on one of my favorite subjects — The Folly Of Forecasts — on NPR with Chicago/Austrian economist Russ Roberts, now at George Mason University. click here for audio > Previously: Apprenticed Investor: The Folly of Forecasting Barry Ritholtz TheStreet.com, June 07, 2005 http://www.thestreet.com/story/10226887/apprenticed-investor-the-folly-of-forecasting.html Source: The Folly Of Economic Forecasts NPR, December 7,…Read More

Category: Analysts, Economy, Really, really bad calls

WSJ: Are Humans Responsible for Climate Change?

Wow, the results of this WSJ poll was surprising: > chart courtesy of WSJ > And they teed up the poll with this description: This decade is on track to become the warmest since records began in 1850, and 2009 could rank among the top-five warmest years, the U.N. weather agency reported on the second…Read More

Category: Really, really bad calls, UnScience