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Honestly - stuff like this reinforces a feeling I have had recently that the social sciences are nothing more than pseudoscience dressed up most of the time. E

Honestly - stuff like this reinforces a feeling I have had recently that the social sciences are nothing more than pseudoscience dressed up most of the time. Economists have essentially no idea what is going on and neither do their financial compatriots and the EMH is by far the clearest example of this. I'm trying to make it a personal rule that anything outside of the hard sciences (math/physics/chemistry/statistics etc) is bullshit to me until further notice. I mean really - I do advanced math and statistics in moderately complex systems - AI/robotics - and I can barely wrap my head around them. I shake my head in disgust at those who apply platonic and unrealistic theories to the extremely complex system that is the world. Indeed, the surety they display in their theories amuses me, because to even think that one can reason about the entire world all at once is, in fact, hilarious.

throwaway64 14y ago
This kind of armchair criticism is not particularly enlightening, or productive. You can still make useful and largely correct predictions without understanding all of the dynamics in a system. After all, all science amounts to an approximate model, even your vaunted "hard sciences".
- confluence 14y ago
  I'm sorry but were you alive during the last couple hundred financial crises? I mean if your entire field is dedicated to predicting the future of finance and economics and you don't predict them - it kind of shows that you really don't know what you are doing. All I'm doing is pointing out that the social sciences have no clothes on.
  - jbrechtel 14y ago
    right....because the field of math has never changed course (see: Godel), nor physics (see: Newton, Einstein, )... You're reading too much into the disproportionate effect mistakes in economics have had on society. Science get things wrong all the time...failure is part of the learning process.
    - confluence 14y ago
      True but at least the hard sciences modify after being falsified. The social sciences don't have to because they aren't based on the scientific method - mainly the design and independence of repeatable experiments with controlled variables. Hard science equations have no room for bullshit whereas the social ones do - hence EMH is still taught.
      - jbrechtel 14y ago
        I don't know. We've seen the idea of rational agents in economics go away, right? Also...I'm not an economist so I don't really know what's going on in this area...but maybe EMH is still being taught because it's the best model we have at the moment? Are you sure it's being taught everywhere? Maybe some places have already dropped it? Change takes time.
        confluence 14y ago
        Rational actor model still reigns supreme. EMH is taught globally and it will continue to be taught until such a point as people stop believing.
        jbrechtel 14y ago
        Awkward...
        confluence 14y ago
        What do you mean?
      - yummyfajitas 14y ago
        The social sciences don't have to because they aren't based on the scientific method - mainly the design and independence of repeatable experiments with controlled variables. The same is true of many physical sciences - geophysics, oceanography, climate science, astronomy, etc. Your criticism applies to basically any scientific theory which has poorly understood microfoundations (i.e., a lot of them). The EMH is taught because it's a useful approximation to reality, even if it's imperfect. Or, as the article puts it: Whether markets are efficient or not, and whether P = NP or not, there is no doubt that there will be markets that can allocate resources very close to efficiently and there will be algorithms that can solve problems very close to efficiently. Incidentally, the EMH claims that financial crises are unpredictable. So the lack of useful predictions of the financial crisis is evidence in favor of the EMH. [edit: Note, in response to Dn_Ab that 3SAT, the problem considered by the paper, is NP complete.]
  - meric 14y ago
    "I mean if your entire field is dedicated to predicting the future of finance and economics and you don't predict them - it kind of shows that you really don't know what you are doing." I thought the field of finance and economics was about how, unless you have something other people don't, market prices cannot be predicted?
- PeterWhittaker 14y ago
  Not this. Unless we have explicitly and fairly advanced education, and are disciplined enough to apply it to all we do, we - the human species, every single one of us - suck at statistics, are terrible at understanding or predicting the behaviour of complex systems. Read Kahneman's "Thinking,Fast and Slow" to get a better idea as to why. Our biological heritage has left us - oh, OK, the vast majority of us - fundamentally incapable of understanding complex systems and making predictions that have any value beyond the immediate short term. Our intuition - our System 1 heuristics (read the book) - is completely ill-suited to this, and our reason - System 2 (ditto) - doesn't fare much better without advanced training. Kahneman and others also cite many cases where trained experts make the same errors of judgement and analysis as the rest of us when they stray even fractionally from their areas of expertise. The GP is right: We get a lot more of this "soft stuff" wrong than we get right because we generally don't bother to apply hard science methods to the problem. Personal anecdote: I stopped listening to the news because I used to work in crypto. Well, that's the tl;dr reason. I worked for a company that did PKI and noticed that tech journalists, who might be expected to at least have some greater technical background than just folk made egregious errors in their reporting, in reports that were researched and drafted and edited and considered and fact-checked prior to publication. While PKI is complicated, it is not complex. Not like the economy. So if these "specialized" journalists with a technical leg up could get so much of something so simple so wrong, what were folks with degrees in English and/or journalism doing to something as advanced and out of our grasps as the economy? Truth be told, I haven't stopped reading the news - I read it differently. Should an interesting headline catch my eye, I look for a few more. The more interesting the story, the more sources I check/read before accepting to learn anything from the reporting. This is a necessary side effect of how complex the world and its news are, and how simplistic reporting is. Economists had no idea why their theories of rational actors were so flawed (but flawed they knew them to be) until Kahneman and Tversky came along. Hard science can only cast light on the dismal and dark, and the dismal and dark will remain so, will remain largely speculative, until they adopt our tools.
  - confluence 14y ago
    I do the same. I try to make sure new interesting models of the world are kept at arms length until I've at least tried to fully understand it myself. I'm still free to use them as black boxes but I always remind myself that they are subject to catastrophic failure at any point in time.
- makomk 14y ago
  To put it bluntly, the universe is not sneaking around behind your back and trying to exploit any hole in your models it can find. Businesses and the financial marketplace do exactly that with economic models.
Symmetry 14y ago
I wouldn't say that economists have no idea about this, or that their theories aren't useful. No falling object you'll ever encounter actually matches the equation h = h0 - (1/2)gt^2 perfectly, but the equation is still useful. If the efficiency of a market is limited by computational constraints, well, we already knew it was limited by transaction costs, so while this finding is interesting it doesn't change how we should view the world.
wamatt 14y ago
Honestly - since your profile advertises "Calling out bullshit in your own thinking and everyone else's is a very important skill." Let me help try help you out :). Here are some more of your quotes: 'Everyone is ruled by incentives' 'If it's a derivative of a psychological bias <...>' Rather strange to be making claims involving incentives and psychology, for someone that rules everything outside the 'hard sciences' as bullshit. (FWIW I studied math, cs, applied math and physics at varsity but learned a great deal of knowledge that corresponds well with reality, outside of those fields)
- confluence 14y ago
  You'll notice I said until further notice. This does not preclude from a) understanding psychology or b) being wrong. Hence - until further notice everything I have ever stated is probably wrong and biased. Just like everyone else.
  - wamatt 14y ago
    Did you edit your reply? Not sure, but I suddenly read my rebuttal and I sounded like a dick, so I toned it down. Sorry - unusually cranky this morning :) The article is quite probably BS as you point out, and I have no idea. However keeping an open mind seems like a worthy goal, irrespective of the BS that goes on in any field and even if the social sciences do tend to be less empirically rigorous. And while it's exceedingly complex, there are indeed some people (albeit a precious few), that understand how the economic machine works. Ray Dalio is one such example.
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pron 14y ago
This stuff shows absolutely nothing. The author misrepresents what an efficient market means and then "proves" a tautology about it. (see my other comments, but it basically erroneously understands an efficient market to be one which knows everything that is knowable about the past, and then shows that that must include NP-hard problems.) Whether economics has any merit or not is a different issue, but this paper proves absolutely nothing.
tatsuke95 14y ago
>"Economists have essentially no idea what is going on" Complete and utter nonsense. "You" don't know what's going on, and assume others don't. The public is unbelievably ignorant of this subject. These men are brighter than you think. >"EMH is by far the clearest example of this" EMH is a 50 year-old theory. Like practically any other subject, economics that is taught in school at low-levels is based on old science. There is real, modern research happening on real-world things, just go poke around the Fed's site to see what they're doing.
- confluence 14y ago
  You're probably right. I've only done graduate level courses in economics and finance so there might be PhD level stuff I'm unaware of. I only have one question. If they know what they are doing why do we still have financial crises?
  - nateberkopec 14y ago
    If physicists know what they're doing, why don't I have a flying car? edit: physicists ugh too early in the morning
    - confluence 14y ago
      We do - if you're willing to pay for it. And their called physicists.
      - ColinWright 14y ago
        Yes, and it's spelled "they're". See Muphry's (sic) law on wikipedia.
        dfc 14y ago
        Did you include the "sic" as a joke? If so well played my friend, if not the streak continues. Including "sic" is grammatically incorrect because you are not transcribing an error or misspelling something on purpose.
pron 14y ago
To me stuff like this actually shows how some hard-science people apply autistic-like literal interpretation even to things that do not lend themselves to literal, narrow, interpretations. I'm sure, though, that many hard science people can expand their horizons enough to absorb different kinds of knowledge, too.
- confluence 14y ago
  True no doubt. But you do assume that I don't know these other types of knowledge when in fact I do. Your open mind argument can be applied to spiritual and alternative medicine just as well - all knowledge is not equal.
- anonymouz 14y ago
  But the author claims that something is equivalent to P=NP! Now, P=NP does have a very "literal, narrow interpretation" (read: it has a very precise meaning), in fact, this is the only interpretation in which it makes sense at all. So if you claim that something is equivalent to it, you better be prepared to define what exactly "something" is, and give a rigorous argument as to why it's equivalent. Some hand-waving with vaguely defined and ambiguous terms just doesn't cut it.
  - dingfeng_quek 14y ago
    I have to agree. The author hasn't dealt with all the unsolved problems with bounded rationality, which quite frequently involves the inability to compute the future (the case where even if perfect information is available). Then, somehow, he "models" the cost as computational complexity, of a particular sort. But that's why we have peer reviews.
  - pron 14y ago
    He interprets the definition of an efficient market as one that immediately represents all that is theoretically knowable about a security by the present time. Using this literal interpretation, everything that is knowable includes solutions to NP-hard problems. In fact he could have used it to show much more. If the price represents all that is knowable by the present time, than that means than not only all information is processed in zero time, information must travel instantly. He could have just as well claimed that for markets to be efficient information must travel faster than the speed of light. The definition of an efficient market actually means that that the price of a security at time T represents all that market players can deduce about its history by time T, using information travel and processing speeds that market players possess. It really just means that everything that is historically known about the security can and will be used to determine its price as fast as possible. If it isn't possible - it won't determine the price.
meric 14y ago
"Economists have essentially no idea what is going on and neither do their financial compatriots and the EMH is by far the clearest example of this." You only learn about EMH in first or second year in university; It is debunked in later years. It's like how you get taught first newtonian physics then later on when you're taught relativity, you learn that newtonian physics is not quite right but for many cases it is a good enough approximation. "I shake my head in disgust at those who apply platonic and unrealistic theories to the extremely complex system that is the world. " That is unfortunate. Markets are extremely interesting to study. A market is a powerful machine very good at resource allocation. It is the third example of how simple interactions can give rise to computational power. The first two being "evolution" and "the turing machine".
- confluence 14y ago
  You sure about the latter model being taught? Behavioral finance still doesn't feel like a first class citizen in most places.
  - meric 14y ago
    It's not quite behavioural finance but marginal benefits and marginal costs as applied to market efficiency. From the author of the EMH in 1991, 21 years after proposing the EMH. "A weaker and economically more sensible version of the efficiency hypothesis says that prices reflect information to the point where the marginal benefits of acting on information (the profits to be made) do not exceed the marginal costs (Jensen (1978))." http://efinance.org.cn/cn/fm/Efficient%20markets%20II.pdf http://efinance.org.cn/cn/fm/Efficient%20markets%20II.pdf
    - confluence 14y ago
      So basically what you are saying to me is that 1=1 if and only if rational investors have more capital than irrational ones. That's useful isn't it...
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sethrin 14y ago
I admit to little knowledge of economics, but to me it seems as complex a system as weather, without the underlying physical certainties. My reading of Fama and Mandelbrot seems to indicate that markets are essentially random and unpredictable. Being largely uninformed on the matter, though, I would appreciate any explanation of Mandelbrot's theories and their relevance to the topic at hand, as they seem to have been largely ignored by economists -- I could not speculate as to why. To me the tools of chaos theory seem apt to describe markets, insofar as they may be described. If they happen to yield no useful results, I would believe that such may not be obtained. I would appreciate correction on this matter.

throwaway64 14y ago

This kind of armchair criticism is not particularly enlightening, or productive. You can still make useful and largely correct predictions without understanding all of the dynamics in a system. After all, all science amounts to an approximate model, even your vaunted "hard sciences".

confluence 14y ago
I'm sorry but were you alive during the last couple hundred financial crises? I mean if your entire field is dedicated to predicting the future of finance and economics and you don't predict them - it kind of shows that you really don't know what you are doing. All I'm doing is pointing out that the social sciences have no clothes on.
- jbrechtel 14y ago
  right....because the field of math has never changed course (see: Godel), nor physics (see: Newton, Einstein, )... You're reading too much into the disproportionate effect mistakes in economics have had on society. Science get things wrong all the time...failure is part of the learning process.
  - confluence 14y ago
    True but at least the hard sciences modify after being falsified. The social sciences don't have to because they aren't based on the scientific method - mainly the design and independence of repeatable experiments with controlled variables. Hard science equations have no room for bullshit whereas the social ones do - hence EMH is still taught.
    - jbrechtel 14y ago
      I don't know. We've seen the idea of rational agents in economics go away, right? Also...I'm not an economist so I don't really know what's going on in this area...but maybe EMH is still being taught because it's the best model we have at the moment? Are you sure it's being taught everywhere? Maybe some places have already dropped it? Change takes time.
      - confluence 14y ago
        Rational actor model still reigns supreme. EMH is taught globally and it will continue to be taught until such a point as people stop believing.
        jbrechtel 14y ago
        Awkward...
        confluence 14y ago
        What do you mean?
    - yummyfajitas 14y ago
      The social sciences don't have to because they aren't based on the scientific method - mainly the design and independence of repeatable experiments with controlled variables. The same is true of many physical sciences - geophysics, oceanography, climate science, astronomy, etc. Your criticism applies to basically any scientific theory which has poorly understood microfoundations (i.e., a lot of them). The EMH is taught because it's a useful approximation to reality, even if it's imperfect. Or, as the article puts it: Whether markets are efficient or not, and whether P = NP or not, there is no doubt that there will be markets that can allocate resources very close to efficiently and there will be algorithms that can solve problems very close to efficiently. Incidentally, the EMH claims that financial crises are unpredictable. So the lack of useful predictions of the financial crisis is evidence in favor of the EMH. [edit: Note, in response to Dn_Ab that 3SAT, the problem considered by the paper, is NP complete.]
- meric 14y ago
  "I mean if your entire field is dedicated to predicting the future of finance and economics and you don't predict them - it kind of shows that you really don't know what you are doing." I thought the field of finance and economics was about how, unless you have something other people don't, market prices cannot be predicted?
PeterWhittaker 14y ago
Not this. Unless we have explicitly and fairly advanced education, and are disciplined enough to apply it to all we do, we - the human species, every single one of us - suck at statistics, are terrible at understanding or predicting the behaviour of complex systems. Read Kahneman's "Thinking,Fast and Slow" to get a better idea as to why. Our biological heritage has left us - oh, OK, the vast majority of us - fundamentally incapable of understanding complex systems and making predictions that have any value beyond the immediate short term. Our intuition - our System 1 heuristics (read the book) - is completely ill-suited to this, and our reason - System 2 (ditto) - doesn't fare much better without advanced training. Kahneman and others also cite many cases where trained experts make the same errors of judgement and analysis as the rest of us when they stray even fractionally from their areas of expertise. The GP is right: We get a lot more of this "soft stuff" wrong than we get right because we generally don't bother to apply hard science methods to the problem. Personal anecdote: I stopped listening to the news because I used to work in crypto. Well, that's the tl;dr reason. I worked for a company that did PKI and noticed that tech journalists, who might be expected to at least have some greater technical background than just folk made egregious errors in their reporting, in reports that were researched and drafted and edited and considered and fact-checked prior to publication. While PKI is complicated, it is not complex. Not like the economy. So if these "specialized" journalists with a technical leg up could get so much of something so simple so wrong, what were folks with degrees in English and/or journalism doing to something as advanced and out of our grasps as the economy? Truth be told, I haven't stopped reading the news - I read it differently. Should an interesting headline catch my eye, I look for a few more. The more interesting the story, the more sources I check/read before accepting to learn anything from the reporting. This is a necessary side effect of how complex the world and its news are, and how simplistic reporting is. Economists had no idea why their theories of rational actors were so flawed (but flawed they knew them to be) until Kahneman and Tversky came along. Hard science can only cast light on the dismal and dark, and the dismal and dark will remain so, will remain largely speculative, until they adopt our tools.
- confluence 14y ago
  I do the same. I try to make sure new interesting models of the world are kept at arms length until I've at least tried to fully understand it myself. I'm still free to use them as black boxes but I always remind myself that they are subject to catastrophic failure at any point in time.
makomk 14y ago
To put it bluntly, the universe is not sneaking around behind your back and trying to exploit any hole in your models it can find. Businesses and the financial marketplace do exactly that with economic models.

Symmetry 14y ago

I wouldn't say that economists have no idea about this, or that their theories aren't useful. No falling object you'll ever encounter actually matches the equation h = h0 - (1/2)gt^2 perfectly, but the equation is still useful. If the efficiency of a market is limited by computational constraints, well, we already knew it was limited by transaction costs, so while this finding is interesting it doesn't change how we should view the world.

wamatt 14y ago

Honestly - since your profile advertises "Calling out bullshit in your own thinking and everyone else's is a very important skill." Let me help try help you out :). Here are some more of your quotes: 'Everyone is ruled by incentives' 'If it's a derivative of a psychological bias <...>' Rather strange to be making claims involving incentives and psychology, for someone that rules everything outside the 'hard sciences' as bullshit. (FWIW I studied math, cs, applied math and physics at varsity but learned a great deal of knowledge that corresponds well with reality, outside of those fields)

confluence 14y ago
You'll notice I said until further notice. This does not preclude from a) understanding psychology or b) being wrong. Hence - until further notice everything I have ever stated is probably wrong and biased. Just like everyone else.
- wamatt 14y ago
  Did you edit your reply? Not sure, but I suddenly read my rebuttal and I sounded like a dick, so I toned it down. Sorry - unusually cranky this morning :) The article is quite probably BS as you point out, and I have no idea. However keeping an open mind seems like a worthy goal, irrespective of the BS that goes on in any field and even if the social sciences do tend to be less empirically rigorous. And while it's exceedingly complex, there are indeed some people (albeit a precious few), that understand how the economic machine works. Ray Dalio is one such example.
- deleted 14y ago
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pron 14y ago

This stuff shows absolutely nothing. The author misrepresents what an efficient market means and then "proves" a tautology about it. (see my other comments, but it basically erroneously understands an efficient market to be one which knows everything that is knowable about the past, and then shows that that must include NP-hard problems.) Whether economics has any merit or not is a different issue, but this paper proves absolutely nothing.

tatsuke95 14y ago

>"Economists have essentially no idea what is going on" Complete and utter nonsense. "You" don't know what's going on, and assume others don't. The public is unbelievably ignorant of this subject. These men are brighter than you think. >"EMH is by far the clearest example of this" EMH is a 50 year-old theory. Like practically any other subject, economics that is taught in school at low-levels is based on old science. There is real, modern research happening on real-world things, just go poke around the Fed's site to see what they're doing.

confluence 14y ago
You're probably right. I've only done graduate level courses in economics and finance so there might be PhD level stuff I'm unaware of. I only have one question. If they know what they are doing why do we still have financial crises?
- nateberkopec 14y ago
  If physicists know what they're doing, why don't I have a flying car? edit: physicists ugh too early in the morning
  - confluence 14y ago
    We do - if you're willing to pay for it. And their called physicists.
    - ColinWright 14y ago
      Yes, and it's spelled "they're". See Muphry's (sic) law on wikipedia.
      - dfc 14y ago
        Did you include the "sic" as a joke? If so well played my friend, if not the streak continues. Including "sic" is grammatically incorrect because you are not transcribing an error or misspelling something on purpose.

pron 14y ago

To me stuff like this actually shows how some hard-science people apply autistic-like literal interpretation even to things that do not lend themselves to literal, narrow, interpretations. I'm sure, though, that many hard science people can expand their horizons enough to absorb different kinds of knowledge, too.

confluence 14y ago
True no doubt. But you do assume that I don't know these other types of knowledge when in fact I do. Your open mind argument can be applied to spiritual and alternative medicine just as well - all knowledge is not equal.
anonymouz 14y ago
But the author claims that something is equivalent to P=NP! Now, P=NP does have a very "literal, narrow interpretation" (read: it has a very precise meaning), in fact, this is the only interpretation in which it makes sense at all. So if you claim that something is equivalent to it, you better be prepared to define what exactly "something" is, and give a rigorous argument as to why it's equivalent. Some hand-waving with vaguely defined and ambiguous terms just doesn't cut it.
- dingfeng_quek 14y ago
  I have to agree. The author hasn't dealt with all the unsolved problems with bounded rationality, which quite frequently involves the inability to compute the future (the case where even if perfect information is available). Then, somehow, he "models" the cost as computational complexity, of a particular sort. But that's why we have peer reviews.
- pron 14y ago
  He interprets the definition of an efficient market as one that immediately represents all that is theoretically knowable about a security by the present time. Using this literal interpretation, everything that is knowable includes solutions to NP-hard problems. In fact he could have used it to show much more. If the price represents all that is knowable by the present time, than that means than not only all information is processed in zero time, information must travel instantly. He could have just as well claimed that for markets to be efficient information must travel faster than the speed of light. The definition of an efficient market actually means that that the price of a security at time T represents all that market players can deduce about its history by time T, using information travel and processing speeds that market players possess. It really just means that everything that is historically known about the security can and will be used to determine its price as fast as possible. If it isn't possible - it won't determine the price.

meric 14y ago

"Economists have essentially no idea what is going on and neither do their financial compatriots and the EMH is by far the clearest example of this." You only learn about EMH in first or second year in university; It is debunked in later years. It's like how you get taught first newtonian physics then later on when you're taught relativity, you learn that newtonian physics is not quite right but for many cases it is a good enough approximation. "I shake my head in disgust at those who apply platonic and unrealistic theories to the extremely complex system that is the world. " That is unfortunate. Markets are extremely interesting to study. A market is a powerful machine very good at resource allocation. It is the third example of how simple interactions can give rise to computational power. The first two being "evolution" and "the turing machine".

confluence 14y ago
You sure about the latter model being taught? Behavioral finance still doesn't feel like a first class citizen in most places.
- meric 14y ago
  It's not quite behavioural finance but marginal benefits and marginal costs as applied to market efficiency. From the author of the EMH in 1991, 21 years after proposing the EMH. "A weaker and economically more sensible version of the efficiency hypothesis says that prices reflect information to the point where the marginal benefits of acting on information (the profits to be made) do not exceed the marginal costs (Jensen (1978))." http://efinance.org.cn/cn/fm/Efficient%20markets%20II.pdf http://efinance.org.cn/cn/fm/Efficient%20markets%20II.pdf
  - confluence 14y ago
    So basically what you are saying to me is that 1=1 if and only if rational investors have more capital than irrational ones. That's useful isn't it...
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sethrin 14y ago

I admit to little knowledge of economics, but to me it seems as complex a system as weather, without the underlying physical certainties. My reading of Fama and Mandelbrot seems to indicate that markets are essentially random and unpredictable. Being largely uninformed on the matter, though, I would appreciate any explanation of Mandelbrot's theories and their relevance to the topic at hand, as they seem to have been largely ignored by economists -- I could not speculate as to why. To me the tools of chaos theory seem apt to describe markets, insofar as they may be described. If they happen to yield no useful results, I would believe that such may not be obtained. I would appreciate correction on this matter.