A Mathematical View of the World

A mathematical view of the world is one of the foundations of science. But our increasing disinterest in, and our deplorable skills in, this science is part of our rejection in science in general. We are only interested in being entertained, and math does not entertain us. As I see it, this is part of a general cultural decline: Poetry does not entertain us either.

This morning I looked at my stack of books to see which ones I could throw away. I would dearly love a library where I could keep all my books forever, but my nomadic life style does not allow this. My eye fell on a bright yellow book:The (Mis)Behavior of Markets by Benoit Mandelbrot. It said it had a new preface on the financial crisis, so I turned to that. It starts off with:

The world-wide market crash of Autumn 2008 has many causes: greedy bankers, lax regulators, and gullible investors, to name a few. But there was also a less-obvious cause: our all-too-limited understanding of how markets work, how prices move, and how risks evolve...

Of course, the fundamental cause of the crash was purely human: over-optimism. The subprime mortgages that undermined our great banks were written on the false assumption that what had been seen before would, more or less, persist into the future: housing prices would keep rising, default rate would say within a forecast range, hedging strategies that worked hitherto would keep on working. That kind of thinking has led to every financial bubble in history - from tulips in seventeenth-century Holland to dot-coms in late-twentieth-century America.

But the 2007/08 credit crisis was magnified by an phenomenon new to our generation: an over-confidence in our understanding of the markets, as reflected by the industry's increasingly sophisticated computer models.

He goes on to say:

When studying markets, it is the supposedly aberrant situation that provides the greatest insight and threat. Biologists know that studying disease helps us to understand the human body. Physicists collide high-energy particles to understand ordinary matter. Meteorologists study hurricanes to forcast the local weather. And economists? Well, by comparison they are a curiously incurious lot.

We urge change. Financial economics, as a discipline, is where chemistry was in the sixteenth century; a messy compendium of proven know-how, misty folk-wisdom, unexamined assumptions, and grandiose speculation. Most of it focuses on practical aims, such as making money or avoiding loss for whoever is paying for the research, whether a bank or a government. While there is nothing wrong with that, it does mean that the flow of scientific information is sharply curtailed by self-interest. A bank in which the research department thinks it has discovered something new and useful will not share it with anyone else. Being focused on profit, not knowledge, it is unlikely to fund fundamental research.

What is needed is a Project Apollo for economics - a sizable, coordinated effort to advance human knowledge.

Without that knowledge we are doomed.

This book was mostly ignored, so he wrote The Black Swan, intended for the general public. In his home page he says he has now given up on trying to educate anyone:

Bernanke's farce was not a cause, but a nauseating trigger: I have more important things to do than keep throwing pearls before swine.

You may note that I am back to using Blogger.com for this posting. I have floundered all over the place: WordPress and TypePad have both let me down. I seem to be stuck with Google for almost everything. I would rather not get into bed with a giant, but war makes strange bedfellows.