I forgot all the graph theory I taught myself over the summer and that’s depressing.
Imagine having 2 dads, and then them divorcing and dating other men. Then you’d have 4 dads.
The amount of dad jokes…
"Hi hungry, I’m dad."
"Hi dad, I’m dad too!"
"Hi dad too, I’m dad three."
"Hi dad three, I’m dad."
What have you done
The normativity of mathematics is especially apparent in statistics. In pqrticular, consider the bell (belle) curve, which statisticians are so fixated upon. In spending undue time studying this curve, statisticians privilege the unrealistic aesthetic standards that characterize conventional beauty, thus oppressing other curves not privileged enough to be belle. Furthermore, this obsession with the image of curves rather than the curves themselves is a blatant act of objectification, which erases essential characteristics of such curves not embodied in the8r shapes.
One word: Fragmentation. Math is made separate from science- the formulas exist for themselves, and the answers are meaningless. Science is separate from engineering- what difference does it make if earth’s gravity is 9.8 m/s^2? Formal logic? It isn’t even there, but by…
When someone tells you he’s doing a math and philosophy major, you can pretty safely conclude that when he says “philosophy”, he has in mind Carnap, Russell, Wittgenstein instead of Nietzsche, Camus, Sartre.
Economists typically object to preference-based explanations of human behavior; differences in preferences “explain everything and therefore nothing”. But this argument is only correct assuming that no empirical evidence exists to discipline preference-based explanations. In fact, over the past decade, personality psychologists have produced a robust collection of stylized facts about human preferences. While preferences are, empirically, quite stable, they are far from identical and have proven predictive power for economically interesting variables. The empirical challenge for future research is to jointly estimate the impact of preferences and constraints to obtain unbiased measures of their relative importance.
This is me back in 2010:
The EMH is approximately true; indeed it’s almost impossible for me to imagine any other model of financial markets. But it’s not precisely true, again, just as you’d expect. After all, if the EMH were perfectly true then no one would have any incentive to estimate fundamental values. We know people are imperfect and hence that any real world human institution, including markets, will be at least slightly imperfect.
A smart person like Eugene Fama should have been able to come up with both the EMH, and its limits, by just sitting in a room and thinking. Much as David Hume got the QTM by imagining what would happen if everyone in England woke up one morning with twice as much gold in their purses. Or Fisher’s theory of inflation and nominal interest rates. Or Cassel’s purchasing power parity. Or Friedman/Phelps’ natural rate hypothesis. Or Muth and rational expectations. Certain ideas are simply logical, and that’s why I have no doubt that despite all those economists on the left arguing the EMH has been discredited, it will still be taught in every top econ/finance grad program 100 years from now, whereas fiscal stimulus will be long gone from macro textbooks.
PS. Why will fiscal stimulus be gone? Because even Krugman admits it only makes sense at the zero bound. And we are rushing headlong into a world of all electronic money–probably within 50 years. There is no zero lower bound with electronic money, and hence the Taylor Rule is all you need. Old Keynesian economics will vanish, leaving only new Keynesianism.
And here’s my doppelganger Noah Smith 4 years later:
Now, the analogy between the EMH and Newton’s Laws is far from perfect. Newton’s Laws are wrong in a finite set of ways, under conditions that are predictable and well-known. The EMH, in contrast, is wrong in an infinite number of ways, and the set of the most important ways in which it’s wrong is constantly changing, as old anomalies are traded away and new ones crop up. Also, the EMH is actually a family of hypotheses, since you need a model of risk to specify it properly.
But like Newton’s Laws, the EMH is deep and fundamental. If you went through a wormhole and visited an advanced alien civilization, what would they think about financial markets? Chances are, they wouldn’t use the Capital Asset Pricing Model, or the Fama-French 3-Factor Model, or the Shiller CAPE. But I bet they would have some version of the Efficient Market Hypothesis.
This is because the EMH doesn’t emerge from any peculiarity of the way our market system is set up, or the way human beings behave. The EMH comes from something much deeper than that, something that probably has to do with information theory. It comes from the fact that when you exploit information to make a profit in a financial market, you decrease the amount that others can exploit that information. In other words, the financial value of information gets used up. That sounds simple and obvious, but so are the principles that give rise to Newton’s Laws.
In any case, the anomalies that make the EMH not quite right may also have deep explanations, but we don’t know what those are yet. When we do, that will be a big advance in finance theory. But the EMH will still be the jumping-off point for any theory of financial markets, on this planet or any other. It will always be wrong, but never useless.
Noah reached this insight 4 years after I did. But don’t be fooled, he’s much more than 4 years younger than me. He reached enlightenment at a younger age because he’s also much smarter than me.
Interesting paper using a neat statistical method to test the productivity theory of distribution. The findings of the paper are summarised in the conclusion:
Our results using data on manufacturing firms in Chile suggest moderate deviations from marginal productivity theory that also depend on firm size. For small firms, we find that labor input by non-owners is overpaid in some cases, while capital and intermediate inputs tend to be slightly underpaid. The fact that the explicit payments to capital fall short of its marginal product appears to be related to an overpayment of firm owners’ labor input, indicating that in small firms the remuneration of firm owners’ labor input cannot be separately identified from the remuneration of their capital input. For medium-sized firms we also find that non-owners’ labor input is slightly overpaid in some cases, indicating that employees may have a certain degree of bargaining power. One should note however, that in most cases these effects are only marginally significant. Capital is also slightly overpaid in medium-sized firms but only if the residual profits retained in firms are taken into account as a part of capital’s remuneration. As in small firms, the contribution of intermediate inputs to output is slightly larger than their costs. The latter is also true for large firms, where the amount of underpayment of intermediate inputs is even larger than in small and medium-sized firms. This suggests that market power in input markets increases with firm size. In large firms, the profits obtained from the underpayment of intermediate inputs solely accrue to capital holders, while the factor labor only receives its marginal product. This indicates that in large firms, employees do not have additional bargaining power. Overall, given that the overpayment of the factor labor that is observed in some cases of small to medium-sized firms is only marginally significant, a fair description of the evidence found is that there are moderate deviations from marginal productivity theory in the form that capital receives more and intermediate inputs receive slightly less than their marginal product.
So apparently the classroom I just left is named after Eugene Fama