Monday, April 26, 2010

Physics envy?

As any academic economist who has done consulting fr government or the private sector can testify, it is very difficult to convey the uncertainty about your results and contract givers expect precise numbers with no standard errors. It is particularly ironic that the financial industry, which lives from uncertainty, cannot cope with advice that has qualifications and caveats.

This interpretations does not appear to be shared by Andrew Lo and Mark Mueller, who claim that economists suffer from Physics envy in the sense that they want precise results like in a Physics laboratory. They see part of the reason for the current crisis in the large reliance on quants in the finance industry, and that those quants have neglected that market participants do not behave like electrons, they have feelings and can be unpredictable.

I share with the authors the belief that this crisis is not a failure of Economics and economists, but rather that the expectations of the customers of those economists were way too high. And when those customers were disappointed, they blamed the profession. This rather long paper tries to educate those customers how it really works in Economics, and shows that even Physics is not immune from this unpredictability.


Anonymous said...

I recall reading a comment by an author in the "letters to the editor" section of the WSJ. It went something like this -

"Economics is history trying to be physics. In this needless to say, it does not succeed." :-)

Barkley Rosser said...

Congratulations on a post linked to by Mark Thoma at economists view.

James said...

So we have economists saying that economists are not to blame? Very suspicious.

Anonymous said...

Economists refuse to apply physics to economics.

The Laws of Physics cannot tell the difference between CAPITAL Goods and DURABLE CONSUMER GOODS. A consumer's NET WORTH goes down as their durable consumer goods wear out. But economists add those goods to GDP when purchased and do not subtract them as they wear out. So we are running a planet of seven billion people on defective grade school algebra.