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I think "Algernon's law" and the "Efficient Market Hypothesis" are suspect because they amount to "Just So Stories"[1] about the vastly complicated topics of ne

I think "Algernon's law" and the "Efficient Market Hypothesis" are suspect because they amount to "Just So Stories"[1] about the vastly complicated topics of neurobiology and investing. Limiting the field of inquiry of researchers and specialists in these topic by proclaiming these broad general laws, and thus ignoring possibly useful new technology, theory, or experimental evidence is not rational. 1. http://rationalwiki.org/wiki/Ad_hoc http://rationalwiki.org/wiki/Ad_hoc

draw_down 11y ago
Also, they become intellectual "defaults" such that any argument which does not assume their truth must be incorrect. They become self-referential, considered true because people assume them to be true.
- derefr 11y ago
  Phrased more optimistically, they're axioms: assumptions underlying all the research, such that if you did change them, your own hypothesis wouldn't be able to lean on any of the existing research for support—because your hypothesis would exist in a different axiomatic universe from everything else. That's not to say you shouldn't; the axioms assumed in the model might not be the same ones that actually apply to our own universe. But frequently, the only thing that studies like economics care about is whether something is true or false in the model, rather than whether it's true or false in reality. In economics (and in many other disciplines) the model is an idealized universe we're interested in studying for its own sake, whether or not it is a perfect (or even close) description of reality. In other words: while we may never learn whether there can be such a thing as an efficient market on Earth, we will be able to know decisively whether there can be an efficient market in the nation of RationalActoria, a land-plate resting on a giant spherical cow. And knowing that can actually be helpful! Especially, the knowledge that something can't be true, even under those conditions, can frequently tell us a lot about whether it can happen in the real world. And that's the real concept to learn there, I think: that even a stupid, low-dimensional model that doesn't have much precision in reflecting the real world can very effectively answer real questions, especially questions about what can't happen—because if it can't happen in "ideal conditions", it certainly can't happen in real ones.
  - freshhawk 11y ago
    That's well put, but clearly not the implied takeaway - given that they are interspersed with other items describing real world subtle human biases.
0xcde4c3db 11y ago
There's a classic joke related to the EMH: An undergraduate and an economics professor are walking across campus. The undergrad sees a bill on the ground. Getting closer, he sees that it's a $100 bill. "Professor, there's a $100 bill on the ground there!", he says. "No there isn't", the professor responds. "If there were really a $100 bill, someone would have picked it up".
- edanm 11y ago
  And the brilliant continuation of this story I once heard: Everybody always tells this joke to make fun of economics professors who believe in the EMH. But - have you ever actually found a $100 bill lying on the ground? If not, that's the EMH in action :)
freshhawk 11y ago
More specifically Algernon's law seems to lean on the fallacy of humans being some kind of endpoint of evolution or perhaps a misunderstanding of the time scales involved. The efficient market hypothesis and a number of other items here are useful ideas to know, but you simply have to understand the limited applicability of modeling humans as rational actors. It's the equivalent of spherical cows or frictionless planes in Physics.
hibikir 11y ago
The big problem with the EMH is how easy it is to miss what it actually means: That human behavior, when combined, is aggregating all publicly known information. So a market can have a price that is a terrible estimate in hindsight, but that's because of hidden information. Pure market speculation is betting on your own personal information being better than the information available at large. If you really have better information, you are improving the quality of the market price. In no way does it mean that going against a market price, or common sense, is asinine: It's just asinine to do so without first getting some special insight. Another common misconception is that it requires perfectly rational market participants, when all it needs is a semblance of rationality in the aggregate: That individual mistakes happen in multiple directions. When that's the case, if people can know that the population is biased in a specific direction on average, the market adapts by providing better returns to the people betting in the opposite direction, which lets them bet harder later. We have plenty of evidence that the EMH works in a general sense: It makes predictions after all, and they are testable. The rise of index funds is, in practice, saying that the EMH is true, and that we have so many people trying to devise the right prices of stocks that we are better off not paying them a dime, and going with their average prediction, saving ourselves the fees. And what do we see? Index fund that perform well enough that they are the biggest investors in pretty much every component in the SP500. And their share will keep growing until so much of the money is in an index that the average fund manager can beat the market by enough to make the fees worthwhile. So I don't see how this hurts researchers and specialists: It just makes them focus on the search for novel information. It's the same when we try to create a new javascript framework, for instance: If web development has stunk for a couple of decades, what is the key insight that everyone else as missed? Without a key, novel insight, it'd all be busywork.

draw_down 11y ago

Also, they become intellectual "defaults" such that any argument which does not assume their truth must be incorrect. They become self-referential, considered true because people assume them to be true.

derefr 11y ago
Phrased more optimistically, they're axioms: assumptions underlying all the research, such that if you did change them, your own hypothesis wouldn't be able to lean on any of the existing research for support—because your hypothesis would exist in a different axiomatic universe from everything else. That's not to say you shouldn't; the axioms assumed in the model might not be the same ones that actually apply to our own universe. But frequently, the only thing that studies like economics care about is whether something is true or false in the model, rather than whether it's true or false in reality. In economics (and in many other disciplines) the model is an idealized universe we're interested in studying for its own sake, whether or not it is a perfect (or even close) description of reality. In other words: while we may never learn whether there can be such a thing as an efficient market on Earth, we will be able to know decisively whether there can be an efficient market in the nation of RationalActoria, a land-plate resting on a giant spherical cow. And knowing that can actually be helpful! Especially, the knowledge that something can't be true, even under those conditions, can frequently tell us a lot about whether it can happen in the real world. And that's the real concept to learn there, I think: that even a stupid, low-dimensional model that doesn't have much precision in reflecting the real world can very effectively answer real questions, especially questions about what can't happen—because if it can't happen in "ideal conditions", it certainly can't happen in real ones.
- freshhawk 11y ago
  That's well put, but clearly not the implied takeaway - given that they are interspersed with other items describing real world subtle human biases.

0xcde4c3db 11y ago

There's a classic joke related to the EMH: An undergraduate and an economics professor are walking across campus. The undergrad sees a bill on the ground. Getting closer, he sees that it's a $100 bill. "Professor, there's a $100 bill on the ground there!", he says. "No there isn't", the professor responds. "If there were really a $100 bill, someone would have picked it up".

edanm 11y ago
And the brilliant continuation of this story I once heard: Everybody always tells this joke to make fun of economics professors who believe in the EMH. But - have you ever actually found a $100 bill lying on the ground? If not, that's the EMH in action :)

freshhawk 11y ago

More specifically Algernon's law seems to lean on the fallacy of humans being some kind of endpoint of evolution or perhaps a misunderstanding of the time scales involved. The efficient market hypothesis and a number of other items here are useful ideas to know, but you simply have to understand the limited applicability of modeling humans as rational actors. It's the equivalent of spherical cows or frictionless planes in Physics.

hibikir 11y ago

The big problem with the EMH is how easy it is to miss what it actually means: That human behavior, when combined, is aggregating all publicly known information. So a market can have a price that is a terrible estimate in hindsight, but that's because of hidden information. Pure market speculation is betting on your own personal information being better than the information available at large. If you really have better information, you are improving the quality of the market price. In no way does it mean that going against a market price, or common sense, is asinine: It's just asinine to do so without first getting some special insight. Another common misconception is that it requires perfectly rational market participants, when all it needs is a semblance of rationality in the aggregate: That individual mistakes happen in multiple directions. When that's the case, if people can know that the population is biased in a specific direction on average, the market adapts by providing better returns to the people betting in the opposite direction, which lets them bet harder later. We have plenty of evidence that the EMH works in a general sense: It makes predictions after all, and they are testable. The rise of index funds is, in practice, saying that the EMH is true, and that we have so many people trying to devise the right prices of stocks that we are better off not paying them a dime, and going with their average prediction, saving ourselves the fees. And what do we see? Index fund that perform well enough that they are the biggest investors in pretty much every component in the SP500. And their share will keep growing until so much of the money is in an index that the average fund manager can beat the market by enough to make the fees worthwhile. So I don't see how this hurts researchers and specialists: It just makes them focus on the search for novel information. It's the same when we try to create a new javascript framework, for instance: If web development has stunk for a couple of decades, what is the key insight that everyone else as missed? Without a key, novel insight, it'd all be busywork.