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There is so much armchair theory and bullshit surrounding economics (especially in the news) that it's hard to tell what's valid anymore.
by raven105x 7y ago
There is so much armchair theory and bullshit surrounding economics (especially in the news) that it's hard to tell what's valid anymore.
- cbanek 7y agoValid is hard to tell in economics, because economics isn't really a science. More of a social science. A lot of people have debated this point before, but even at a theory level, it imagines people as rational actors, and we know they are not always, and sometimes not ever.
- rahimnathwani 7y ago"even at a theory level, it imagines people as rational actors" There is a whole field of economics ('behavioural economics') that explicitly doesn't make this assumption.
- sprafa 7y agoThat’s the only scientific part about it but afaik it still only applies to micro not macroeconomics. To quote Charlie Munger: “it economics is not behavioural, what the hell is it?”
- TheOtherHobbes 7y agoPolitics. Economics is persuasion. It's about some people telling other people how they should act "because". It's not descriptive or empirical, and never has been. The more honest economists will tell you it's considered part of moral philosophy.
- arethuza 7y agoI can recommend the book "Licence to be Bad: How Economics Corrupted Us" by Jonathan Aldred - it makes a pretty strong case that the way economics has influenced politics over the last few decades has had a pretty strong negative impact on society: https://www.goodreads.com/book/show/43267091-licence-to-be-bad https://www.goodreads.com/book/show/43267091-licence-to-be-b...
- Nasrudith 7y agoMoral philosophy is a part of it and how it is often used but not all of it. It is possible to be objectively incorrect and it becomes rapidly apparent. Use fixed universal prices regardless of location and you /will/ have problems. The Soviets tried unsuccessfully to do a value calculation for their existence. Economics points out for instance that stopping smuggling without offering an alternative serves as a subsidy for the successful smugglers. Doing the math to point out that say a deflationary currency would eventually become worthless as a currency is likewise objective.
- longdelay 7y agoBehavioral economics is just a branch of psychology. A collection of trite rules of thumb relating to how people tend to act in certain "economic" situations. It makes for good reading in the Harvard Business Review.
- MiroF 7y agoIs this true? I've tried to find more depth than this and have admittedly struggled in the past
- longdelay 7y agoIt's really true. When you understand this, it makes you realize how shallow and empty so much of economics really is. Macro investing literature is what you should read if you want to understand the economy. It's less focused on high level concepts and more on specific data points and how they relate to and impact one another.
- jevgeni 7y agoNo, it's not. longdelay has their own interests and thinks that adherence to those interests defines the value of a branch of science for everyone.
- disgruntledphd2 7y agoSo, what became known as behavioural economics was 100% started by two psychologists, Daniel Kahneman and Amos Tversky. While they investigated new topics (i.e. economics), their methodologies were 100% within the standard practice of social and cognitive psychology at the time. They were then awarded the Nobel Prize for this work. Now, not everyone in the field came from psychology, but a lot did, and the methods used in behavioural economics are essentially indistinguishable from those used in psychology. For references, Thinking Fast and Slow is probably the best source, as one of the original authors describes their research program.
- jevgeni 7y ago
- deleted 7y ago[deleted]
- acchow 7y agoThe problem is that this is basically all that behavioral economics is good for.
- Areading314 7y agoEconomics, and social sciences, are still sciences. It's just not as clear cut as say, physics or mathematics. A lot of the interesting parts of economics are how to build models that accurately predict human behavior. In aggregate, it sometimes makes sense to model participants as rational, but this is a very simplistic model that does not always apply. There are lots of economists studying how asymmetric information or irrational participants can cause market failure or other outcomes.
- oarabbus_ 7y agoMathematics is not a science, and model building is not necessarily a science, either. Additionally, a significant number of social scientists aren't scientists.
- Areading314 7y agoI mean... a social science is a science by definition, and making an argument successfully within those fields involves proving it via the same methods that are used in natural sciences. It's just not as easy to eliminate variables and come to clean "laws" as easily, as is possible in say chemistry or physics. There is a lot of gray area, for example is medicine a science? Many treatments or diagnoses are based on probabilistic or empirical models -- that doesn't make them worthless.
- thedudeabides5 7y agoWhen the comments takes only three levels to get to "what is science?"
- havetocharge 7y agoNot sure why you're getting down voted. Economics is a science, full stop.
- kneel 7y agoEconomics is a science as much as Catholicism.
- kortilla 7y agoThis armchair analysis of economics is wrong. Only a small portion of it assumes every person is a rational actor.
- sprafa 7y agoUnfortunately, because otherwise the models wouldn’t work. Tell you more about the models than people.
- astrange 7y agoEmpirical economic studies exist and don't need to make rationality assumptions. It helps if you don't listen to Austrians or anyone from Chicago.
- 6gvONxR4sf7o 7y agoI know a number of economists from chicago and they're very strong empiricists.
- astrange 7y agoYeah, but their opinions on hot dogs are terrible.
- jevgeni 7y agoShhhhh... You're spoiling the myopic STEM elitism.
- 6gvONxR4sf7o 7y agoYou know economics isn't just macroeconomics, right? "It assumes people are rational" is like saying physics isn't a science because "it assumes cows are spherical."
- pessimizer 7y agoOnly if physics entirely consisted of the study of cows, as economics consists entirely of the study of people.
- fouc 7y agoThe whole "people as rational actors" isn't a major underpinning of economics anymore, or is being phased out.
- hollerith 7y ago>it imagines people as rational actors, and we know they are not always Maybe so, but almost all of the irrational actors that still have any savings know not to get fancy in the securities market.
- codesushi42 7y agoMore of a social science It is as much a science as any other study of a complex system. Meaning, yes, it is a science. Economics can be deeply mathematical once you consider the game theory aspect, analysis etc.
- pmiller2 7y agoThe problem with mathematical economics is that the models are incomplete, and people aren’t perfectly rational actors. Math got us into the financial crisis in 2008.
- cameldrv 7y agoYes, bond ratings were a big cause of 2008. Adverse selection/the market for lemons was a big part of that. Suppose the bond rating agency has a set of criteria to rate a bond AAA. You figure out how to structure your product to meet the letter of those criteria in one tranche, but the characteristics of the product's statistical distribution is very different than what the person who made the criteria was expecting. Or, you convince the bond rater into making some more statistical assumptions about the product that the product doesn't actually meet, and then you pass the AAA test with those assumptions in place. There is a blurry line between #2 and #3 which is basically just paying off the bond rater. Ultimately modern structured products creation and sales is basically just like old-school used car sales. Put sawdust in the motor, roll back the odometer, and tell the customer that it was driven by a little old lady that only took it to church and to the supermarket. Caveat emptor.
- codesushi42 7y agoMath got us into the financial crisis in 2008 That is a terrible misunderstanding of the 2008 financial crisis.
- JudgeWapner 7y agothere's a charitable way to read that, which is that they did ample statistical modelling/risk analysis of CDS and "concluded" they were safe enough to bundle mortgage debt under. Then you could sort of "blame math" (or the abuse thereof) in that circumstance. I know CDS is only like 1/10 chapters of the whole crisis, however.
- JamesBarney 7y agoA lot of people confuse what's taught in econ 101 with what the majority of the field is working on. The vast majority of economists do not assume people are rational actors and with with empirical date day in and day out.
- JMTQp8lwXL 7y agoThe article seems reasonably believable. It offers more than the typical fluffy clickbait title with no supporting details. This article has details that merit the title's claim.
- segmondy 7y agoYou have to go meta! Don't just read the news, but try to figure out why they are telling you to buy or sell. ;-)
- leggomylibro 7y agoMy favorite economics quote: "the market can stay irrational longer than you can stay solvent." Also known as: "you can lose a lot of money by being right at the wrong time." It's doubly true when the market is as heavily manipulated as it is today. There's no point in trying to game or predict it at the scale of an individual investor, unless you enjoy the thrill of gambling.
- javert 7y agoI don't believe the second quote is equivalent to the first quote. > There's no point in trying to game or predict [the market] at the scale of an individual investor, unless you enjoy the thrill of gambling. I don't agree with that, either. You can expect the value of stocks in general to go up over time in proportion to the growth of the global economy, which has been broadly predictable since the industrial revolution. You can also hedge risk; not all investments are about making money. Finally, you can certainly outperform the market if you have expertise in a certain sector of the economy. Your complete dismissal of all investing as "gambling" is flippant and incorrect. Warren Buffet is wealthy for a reason. There is a kernel of truth in what you said if it is restated as: amateur investors should not expect to outperform the market.
- deleted 7y ago[deleted]
- SquishyPanda23 7y agoCertainly not all investing is gambling, but picking individual stocks and timing the market are pretty close to gambling. Warren Buffet started and made much of his fortune when there were more inefficiencies in the market. It's not clear that the same method would work today. With all of he data and speed that goes into trading, it's pretty unlikely that you have an informational edge unless you're able to pay for more data sources than everyone else and you have an army of humans looking for patterns for you. That is you need to spend a great deal of money getting that edge. Presumably that is somewhat what Renaissance is doing. Even then you have to deal with the fact that insider trading is essentially instantaneous with modern communication and trading platforms.
- TomMckenny 7y ago>it's hard to tell what's valid anymore. That's the plan as it turns out.
- ericd 7y agoGo read Principles for Navigating Big Debt Crises by Ray Dalio. They (Bridgewater, biggest hedge fund in the world) look at data and economic history, and they’ve done quite well by it.
- 6gvONxR4sf7o 7y agoScience communication for anything important to people (e.g. economics, climate, psychology, health) is generally terrible. On one side, you have people saying "looking at statues makes you atheist" or "this bubble is about to burst." On the other, you have "psychologists are garbage"/"climate change isn't real"/"economists can't predict recessions so they're idiots." The solution is the same for all of them. Effort. When you see reporting you're interested, find the original paper and skim it. At least read the abstract. Turns out the people actually doing the work are usually pretty sensible. There's a lot people don't know, but with this "one simple trick!" you can learn what we're less uncertain about.
- tomp 7y ago> Turns out the people actually doing the work are usually pretty sensible. The replication crisis suggests otherwise; they’re often delusional (believing in things that aren’t there) or outright frauds (publishing results they know are false for personal gain).
- 6gvONxR4sf7o 7y agoSometimes? Yes. Often? I don't think so. Usually? No absolutely not.
- ajross 7y agoThe article isn't really making a prediction (though the headline spins it as if it might). It's pointing out a pretty obvious and easily understood conflict of interest in the way the bond rating market works. When rating packaged debt, the rating companies are not being "hired" by the end investor who will bear the risk, but by a middle-man firm who are creating the security and trying to unload it. So the rating firm only gets hired if the packager thinks they'll rate the security highly. That's a real problem, and needs to be solved. It's not by itself a trigger for a financial crisis, though it's not hard to imagine it becoming one.
- vanderZwan 7y agoExactly, and without taking anything away from the article: this is not a new insight. From the moment it became clear what were the main causes of the financial crisis, there have been plenty of people pointing out that practically nothing was done to actually address them.
- JustSomeNobody 7y agoOf course not. Because up until the bottom falls out, a few people are going to continue to make tons of money.
- nradov 7y agoPotential bond buyers are free to pay an independent third-party service for an independent rating if they want it.
- dev_north_east 7y agoAye, I've a friend who in recent months has moved most of their investments from the stock market to cash. Why? Because of the massive increase in people doing cocaine. I knows it's cliche about the correlation between that and an impending crash but still, seems extreme to actually put your life savings on it!
- tim333 7y agoThe market is also expensive by historic standards and you can make arguments that the expected return going forward is low or negative eg. https://www.gurufocus.com/stock-market-valuations.php https://www.gurufocus.com/stock-market-valuations.php
- dev_north_east 7y agoYes but people have been (rightly) saying this for years. And you'd have been mad to get out of it back then. I'm a passive investor guy. I can't call it and will continue my drip feed.
- snarf21 7y agoThe foreign cash repatriation was a one time deal and has kept this run going. We are also going to have to see more boomers continue to increase their withdrawals. I'm also worried about the long term effect of the "bonus depreciation" that was in the tax cuts.
- tw1010 7y agoEverything I'm not personally an expert in (which I can't verify myself with my own understanding, other than by trust), I assume is somehow deception and largely ignore (until I'm smarter and more well informed). Taking anything from an article like this is only going to muddle up your understanding of the world (which you'll eventually have to work to disentangle).