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I looked into this. The economists have really screwed up here. Basically, Expected Utility Theory (EUT) is wrong. It happens to give the right result by coinc
by ReflectedImage 6y ago
I looked into this. The economists have really screwed up here.
Basically, Expected Utility Theory (EUT) is wrong. It happens to give the right result by coincidence when you set the fudge factor U to log(wealth), which all economists do without any justification.
Well EUT is corrected using the fudge factor, other parts of economics built using it are not.
The nobel prize winning Prospect theory, when you correct the maths, dissolves away into nothing. The theory says people deviate away from the expected rational answer due to psychological reasons. It turns out people use the rational answer, the maths in Prospect theory is just wrong.
Additionally, the famous St. Petersburg paradox isn't a paradox and has an exact answer.
This is a pretty big blow for economics and the economists on social media aren't actually being mature about it.
- zwaps 6y agoEconomists have since refuted the points above: https://www.nature.com/articles/s41567-020-01106-x https://www.nature.com/articles/s41567-020-01106-x Read both sides!
- ReflectedImage 6y agoI have, the economists completely failed to refute Ole Peters' points. As a Comp Sci PhD I'm telling you Ole Peters is correct.
- zwaps 6y agoAs a stats PhD, I am telling you Ole Peters is misunderstanding what EUT is ;-) EUT was developed by von Neumann, someone slightly familiar with ergodicity. It simply is not based on dynamics of out-of-equilibrium systems. Any such thing is an application that adds assumptions to the construct. Ergodicity is an obvious addition in the time domain, it is so obvious that the insight is not even new. However, Peters restricts the problem to a very simple dynamic gamble and then claims that all of economics must be wrong. The very first sentences of Peter's article already get this completely wrong. If you insist on his results, despite the quoted article, the most one can say is that the application of EUT to these problems is questionable. To put it in terms you may be more familiar with. It's like saying that Object Oriented Programming is "wrong", because Python doesn't work for my problem at hand.
- ReflectedImage 6y agoSigh, "Ergodicity is an obvious addition in the time domain" Great, except Ole Peters if you understood his work is adding non-ergodicity. Ole Peters is effectively claiming that static gambles don't exist (outside of utterly bizarre circumstances like parallel universes or co-operatives). The set of problems that you can use EUT on and be correct is almost zero. To simplify: You must always use the Kelly's criteria even for single one-off gambles otherwise you have got the wrong answer. (There are other valid criteria then Kelly's that you could also use but you need to read Ole Peters' paper for them)
- kgwgk 6y ago> The set of problems that you can use EUT on and be correct is almost zero. But his theory is applicable in a strict subset of those...
- ReflectedImage 6y agoNo his theory is applicable to a much wider domain. Basically 99.5% of problems that are being solved with EUT should be solved with ergodicity economics. EUT validity is crushed down to the 0.5%.
- kgwgk 6y agoCould you point to one example where a problem is solved and their solution is not equivalent to the choice of an utility function?
- ReflectedImage 6y ago@kgwgk Ahh misread for a second there. Prospect theory is a good example. When calculated using Ole Peters method Prospect theory does not exist.
- deleted 6y ago[deleted]
- bradleyjg 6y agoAs a Comp Sci PhD I'm telling you Ole Peters is correct. What does being a Comp Sci PhD have to do with anything?
- ReflectedImage 6y agoI understand the concept of modelling, something the economists and stats people are completely missing. This is fundamentally a modelling error. They are using valid maths that models the wrong scenario. Consider a group of 1,000,000 people making gambles. In traditional economics a rational actor will make decisions that maximize the SUM of the 1,000,000 rational actors money. In ergodicity economics a rational actor will make decisions that maximize it's money. A subtle distinction, but as a Comp Sci PhD I can tell you that small modelling error has utterly fatal consequences for large parts of economics. Prospect theory for example is written off. Physics PhDs also do modelling. You can see this as a knowledge gap in understanding of a typical economist or stats person, which is why they are having such difficultly in understanding Ole Peters work.
- bradleyjg 6y agoThe entirety of two fields don’t understand modeling but luckily we have Computer Science, and of course Physics, PhDs to solve all problems in all fields. You have to be aware of how this comes off, right? This is all tongue in cheek?!? I mean your comment might as well have said “So, why does <your field> need a whole journal, anyway?”
- ReflectedImage 6y agoThe maths says they are wrong. There is nothing more to say really. https://www.youtube.com/watch?v=mGBxUNaQI1I https://www.youtube.com/watch?v=mGBxUNaQI1I
- bradleyjg 6y agoIn that case why the appeal to your own authority “as a Computer Science PhD” instead of just showing the math? You are trying to have your cake and eat it too—-no credentials matter except your own.
- billfruit 6y agoThats behind a paywall.. any other link?
- ReflectedImage 6y agohttps://www.youtube.com/watch?v=LGqOH3sYmQA https://www.youtube.com/watch?v=LGqOH3sYmQA
- alimw 6y agoOlle Peters has been pushing this for years. Economists are still working.
- ReflectedImage 6y agoWell economics has never been working. 50% of all maths models in economics fail basic sensitivity analysis tests (read: they can not be correct). It's also refered to as the "dismal science". Ole Peters work is at least a step in the right direction.
- kgwgk 6y agoThe growth-optimality justification for using logarithmic utility is not new. It goes back at least to the 1950's and was discussed by prominent economists. See for example http://finance.martinsewell.com/money-management/Markowitz1976.pdf http://finance.martinsewell.com/money-management/Markowitz19...