Monday, December 19, 2011


Last week, Burton Malkiel reviewed Emanual Derman's Models Behaving Badly (which I have not yet read) in the WSJ (Physics Envy: Creating financial models involving human behavior is like forcing 'the ugly stepsister's foot into Cinderella's pretty glass slipper.')  Malkiel revisits the arguments over why economics is not physics and why misplaced scientism can lead to misunderstandings and errors.  Physicists work with particles that do not experience mood swings.  Mood swings are tough.

Malkiel knows well that market forces are such that entrepreneurial types are hard at work trying to correct prices, but that prices are mostly "wrong".  We are mostly out of equilibrium.  The on-going error correction derby is all we have, but it is very nice to have around.

In yesterday's NY Times Magazine, Adam Davidson wrote about economic indicators (Indicators are supposed to help us predict a recovery or a double dip. But what can nail-polish sales really explain anout the recovery?)   This is a little bit like the fountain of youth.  This is not about theorists, but about pundits and punters.  The Malkiel essay suggests that the theorists (and pundits) are likely to remain frustrated, but the error correction derby suggests that the search for indicators will never stop.  If nail-polish sales predict anything, they will only do so just once.

Is all this why we chuckle at this economist joke (via Craig Newmark)?