Math is Different

Outlook 15Recently I wrote a piece on financial services lies here at Above the Market. Lie #10 was “I don’t need help.” Here’s what I wrote about it.

American virologist David Baltimore, who won the Nobel Prize for Medicine in 1975 for his work on the genetic mechanisms of viruses, once told me that over the years (and especially while he was president of CalTech) he received many manuscripts claiming to have solved some great scientific problem. Most prominent scientists have drawers full of similar submissions, almost always from people who work alone and outside of the scientific community. Unfortunately, none of these offerings has done anything remotely close to what was claimed, and Dr. Baltimore offered some fascinating insight into why he thinks that’s so. At its best, he noted, good science (like good investing and good thinking) is a collaborative, community effort. On the other hand, “crackpots work alone.” Good collaboration among professionals and with good professionals by consumers improves investment outcomes, usually by a lot. A good professional can offer help with goals and plans, an Investment Policy Statement, asset allocation, risk management, behavioral management, protection from fraud (especially for seniors), and tax, estate and financial planning. We all need more help than we think.

A commenter calling himself (herself?) “pott” responded to that post as follows.

“Crackpots work alone” — a crackpot. Damn right, mister.

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What Works

Science2On Saturday, within the context of discussing who the Fed’s next Chair might be, The New York Times asked What Is Economics Good For?  Interestingly, if unsurprisingly, the Times asserted that “the task of the Fed’s next leader will be more a matter of craft and wisdom than of science.” That’s largely because of a less than stellar track record on the part of economists (and by extension, investment managers):  “The trouble with economics is that it lacks the most important of science’s characteristics — a record of improvement in predictive range and accuracy.” As I have noted before, economists have exhibited an “all-too-frequent willingness to elevate a favored ideology ahead of the actual facts.” Indeed, for many economists it seems a point of pride. That they simultaneously tend toward an unwarranted triumphalism too (macroeconomics “has succeeded: Its central problem of depression prevention has been solved”) is both tragedy and delightful irony rolled into one astonishing package.

Per Rama Cont, whose background is in physics, a “hard” science: “When I first became interested in economics, I was surprised by the deductive, rather than inductive, approach of many economists.”  In science, practitioners are supposed to observe empirical data and then build a hypothesis to explain their observations. However, “many economic studies typically start with a theory and eventually attempt to fit the data to their model.”

Many (including analysts as disparate as Cullen Roche and Ben Schreckinger) go so far as to equate economics with religion.  Cullen, like Cont, would (wisely) have us start with stylized facts – as broadly understood and accepted – and work our models and theories from there.  That’s how science is supposed to work. But for economists, it’s often a process honored only in the breach. Continue reading