Three day weekend! Get it started right with our artisinal morning train reads:
• Seven Lies Investors Tell Themselves (Total Return)
• Meet Generation Subprime (USN&WR)
• Mark Zuckerberg Just Wants a Little Privacy. $100 million and 750 Acres of It. (Slate) see also Top CEOs Make 373 Times the Average U.S. Worker (Real Time Economics)
• What’s Wrong With ‘Mathiness’ in Economics? (Bloomberg View) see also Mathiness versus Science in Growth Economics (Growth Econ)
• The GOP Is Dying Off. Literally. (Politico)
The problem with “mathiness” in economics is very simple. Economics practitioners use math to hide their errors and blunders, instead of expose them.
In physics, math is used to explain observed phenomena and when new observations deviate from the math, they figure out new theories using math to explain that and repeat the cycle. So Copernicus, Galileo, Kepler, and Newton used math to demonstrate a helio-centric solar system. Problems with observations of the detail required Einstein to come up with Special and General Relativity. Deviations from Einstein’s math are now requiring “dark matter” and “dark energy” (detailed math yet to come).
In engineering, we use physics and math to build basic models. We recognize the world is a messy place, so we apply empirical coefficients to handle the messy frictions, and then superimpose a factor of safety to address the uncertainties of numerous inputs. That’s how water ends up flowing through our homes and our tall buildings survive hurricanes.
Economists use imaginary perfectly rational human beings in mathematical models and then simply declare all experimental data that doesn’t agree with their theory to be erroneous or irrelevant as it contradicts their economic religious principles. That is the same approach that the Inquisition used to imprison Galileo for heresy for espousing theories that we now know to be generally correct. The good news is that people and societies press on regardless and the religious fanatics generally go by the wayside, but often not until many innocent people have been harmed and societies held back years or decades.
Re: What’s Wrong With ‘Mathiness’ in Economics and Mathiness verses Science …
“Most people, including many inside academia who should know better, assume that math equals science. And rather than remind readers that math is not equal to science, authors often play along with that fiction.” – Dietz Vollrath, The Growth Economics Blog
These two articles make the points I was misunderstood on many months ago when I wrote that for most investors the CAPM and astrology were the same in that both were taken on faith.
There are those who understand the economic arguments and the limits of models as Dietz Vollrath ably demonstrates. And there are those who understand a given model sufficiently to think critically about it (See James Montier’s article http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2007/01/29/capm-is-crap-or-the-dead-parrot-lives.aspx). However, they are among the few. Meanwhile, all of us have within us a relentless System 1 process that takes our clear vivid mental models as reflecting reality, especially if it involves something as mystifying as higher math is for most people. The apocryphal Euler-Diderot incident being the archetype: “Sir, (a+bˆn/n=x; hence God exists, answer please!” http://www.fen.bilkent.edu.tr/~franz/M300/bell2.pdf
There seem to be more “bad actors” these days: politicians, pundits, PR, corporate communications, media conglomerates, etc., though I cannot know for sure not having lived in other times. And even if these disinformation sources are plentiful, they are external, and so are relatively easy to deal with as an “input problem.”
Our internally generated sense of knowledge and certainty is another matter all together. Clear, simple, vivid images that occur near to each other (in space and/or time) will, with repetition, take on the qualities of truth, reality, and causality. The neuroscience is in on this much. It is one of reasons that wrong information, once asimulated, is so hard to revise or remove from our thoughts. But the problem isn’t so much the thoughts as the thinking. Some people are able to take a meta-view more easily than others. Clearly, deep of experience with the subject matter makes a difference. The naive don’t know, and their knowledge is more often on who is an authority than the reliability of the author. But even among the formally educated there is a wide range of reflective capacity. What accounts for this, and what can be done about it bears directly on many of society’s endeavors from economics to individual investors.
The fall and rise of lawyers
Here is a quote from the CNN opinion piece:
Since the 1960s the IRS has collected and published income levels for all American lawyers filing as solo practitioners. In 1988, solo practitioners earned an inflation-adjusted $70,747. By 2012, earnings had fallen to $49,130, a 30% decrease in real income. And note, $49,130 is not the starting salary for these lawyers. It is the average earnings of all 354,000 lawyers who filed as solo practitioners that year.
And the bad news has just started for these lawyers, who now face new competition from online providers of legal services such as LegalZoom and Rocket Lawyer.
Law school applications have plummeted. If the current trend continues, fewer students will apply to law school in 2015-16 than enrolled in law school in 2010-11. Law schools are closing campuses, merging and buying out faculty and staff.
I looked up the definition market breath. Here is a typical one: “A technique used in technical analysis that attempts to gauge the direction of the overall market by analyzing the number of companies advancing relative to the number declining.” But the article implies that market breadth means number of days at a high. Please explain the significance of market breadth as posited in the article.