February 24, 2013

Economics in the dock

Posted in Punk Economics · 13 comments ·

To paraphrase JP Morgan, sometimes nothing undermines your financial judgement so much as an eejit with an economics degree.

At its root, most economics – and economists – start with the fundamental assumption that people are rational, and thus will make logical choices. This would be wonderful, but it’s not true. If there’s one thing we can take from this current crisis – and all the ones before, it’s this: irrationality is everywhere.

  1. anothereejit

    I think the statement above and video sums up a lot of my beliefs.

    I have always been amazed at the lack of ability in many qualified people from all walks of life to come to the answer that their years of channelled schooling should be obvious if logic played its part.

    However, before 2006, I was under the impression that big organisations that base their business mostly on figures (such as banks) would be headed up and controlled by expert mathematicians and people of great logic who could add simple figures and assess risk. This was not the case and there is no reason to believe that it will ever be the case.

    It would seem that the banks should employ the statisticians and administrators from the famous “bookies” mentioned to become the decision makers for the banks and governments. The Queen seems like a sensible lady that asks the correct questions…it is a pity for the UK that she does not make the decisions.

    The World is financially bankrupt. Gold or something like Silver seems like the logical answer to a replacement of the now baseless paper money..but how long will it take and how far can they kick the can down the road? How long can the world population be fooled? Is Gold or silver the replacement and if not what is?

    David, it is irrelevant that you are an economist but much more relevant that you are logical and enjoy having a laugh at the world.

    Great entertainment and enlightening information thank you!

  2. Nice work David. I always found the idea of exclusive rational self-interest a bit unconvincing, and very ideological. Care to take on the second part as well?

  3. rod1015

    Sp there is no “h” in exuberant! Otherwise an excellent paper!

  4. huffnpuffpolly

    We believe what we want to believe. That’s why it’s so important to keep arguing with each other, and make people defend and reflect upon what they believe. Paper money is a bit like god, it only works if you believe in it. Isn’t it really interesting when an economist says most people don’t understand the difference between family budgeting and state budgeting because States don’t pay back the money they owe: they just roll it over. So as long as a country borrows to the extent that the markets think they’ll be able to service the debt,it doesn’t matter how much you tax the citizens. Borrow to the hilt, but not beyond: financial markets happy with secure long-term cash flow. YEP!

  5. pacoh

    Interesting. An interesting perspective on the Irish mentality combining “pendulum emotions”, begrudgery and a dependence on out-dated economic principles.
    Why we rely on the small core of these economic ‘sages’ (who appear to be more fascinated with trying to adopt some new mathematical fads or Nobel Prize winning theories rather than trying to alter accepted economic principles which refuse to integrate concepts like emotionality in the motivations of “John Q. Public”) has always worried me.
    I lived for a number of years in Vietnam, where many thousands of undergraduates opt for “economics” as a course of study, which, in Vietnam, means a bizarre hybrid of Ho Chi Minh Marxism and “post-Communist opportunism”-no real training in the market mechanisms, capital flow, finance….mostly concentrating on political ideology and, well, quite simply, greed. The more I learned about their system, the more I despaired!
    But now I realise that ‘modern’ Western economic principles are almost identical to the “Vietnamese method”. Dependent totally on a superficial knowledge of systems, striving for the quick buck and relying on “gut feelings” (with a sprinkling of ancestor-worship used as a form of “hedging”).
    But the ultimate question for economics in general HAS to be: we listened to these so-called ‘experts’ who failed to predict what is now happening; why are we still listening to them AND why are we still churning out economics graduates who are still be trained in the old failed methodologies?

  6. enbee

    I’m not sure I’d consider people with betting accounts to be professional gamblers – they’re just people that gamble a lot.

    Horse racing is also an interesting one because it’s not an entirely honest sport. (Yes, I know, few are.) Much like some of the business practices that inflate bubbles.

  7. enbee

    Actually make that mostly just people that gamble a lot. I know there are a few that do manage to make a living from it but they’re very rare.

  8. KD

    In your betting shop visit anecdote, your statistics inference is wrong! If two horses have the same odds of winning, then it doesn’t matter on which one one you choose to bet – they both have the same chance of winning. An analogy would be that there is no statistical reason, if betting on coin tosses, not to keep choosing heads. What would be interesting is to ask if the same emotional tendencies occur if the Irish horse has slightly worse odds of winning. They probably do, so overall your article is spot on!

  9. bonbon

    Keynes adored “animal spirits”, hardly rational, and Hayek of the Austrian School adored Mandeville’s “spontaneous unknowable” economics from sheer Dionysiac irrationality. In fact Hayek, the esteemed “rationalist” said Mandeville’s irrationality was the greatest trick ever invented.

    People with degrees in irrationality, which today poses as economics, must assume the pose of logical “thinkers”, so much so they appear robotic. But hidden in their formulations is a rage against creative reason. It is not then surprising the Economics Magazine, that bastion of the logical London School of Economics, must have a Schumpeter Column, posing pure Nietzschean “creative destruction”, the pinnacle of irrationality, and destruction. We see that played out right across the globe. For these severely disturbed irrationalists, if the Euro destroys the economy, it is “good”.

    So the eejit with the economics degree has a fig leaf hiding a rarely displayed Nietzchean insanity. Watch out when the fig leaf falls!

  10. bonbon

    The irrationality of the Euro, the insanity of trying the same formula and expecting different results, as Einstein put it, should make it clear that some are fooled by the Armani suits. The gamblers are the allowed public expession of the institutionalized insanity. The “suits” trick of claiming people are irrational, look at Paddy Powers profit, fools even good commentators, if not all the time.

    Come on, it’s time to cop on.

    The best way to prove the point is put on the table the Triple Curve, Hamiltonian credit and major economic programs. The barely capped irrationality reaches boiling point. It’s is really fun to see the Armani suit doing a jig then!

    Have fun! The potential is enormous!

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