Hubris and humility in the face of uncertainty

Let’s face it. Economics is not a science. The endless blathering and posturing on Fox News, CNBC and Bloomberg shows just how difficult prediction is, especially about the future. (wink)

Markets are human creations and as such are subject to human short-comings: tribalism, self-deception, fraud, greed, and short-sightedness. The fact that very few of us intuitively grasp exponential functions or complex probabilities compounds the problem.

Despite what your retirement advisor says, the efficient market hypothesis is crap.  The market is ruled by fraud, power-plays, politics, and emotion, not sterile logic. Keep that in mind when anyone suggests that the market “should” do “x”. Unless they’re on Ben Bernanke’s speed dial, they don’t know.

The fantasy that markets are mathematical, predictable, and subject to a set of hard and fast rules injects hubris into the study of economics. It finds its personification in the likes of Alan Greenspan, Ben Bernanke, and every Nobel Prize winning economist you’ve never heard of.  Irrational to the point of exuberance, these high-priced fortune tellers approach their pet theories with religious zeal.

No doubt these folks are smarter than most, but they really can’t purport to know how the whole beast functions.  It’s a Leviathan of enormous complexity.

Basically, humans need a medium of exchange (money) as they  labor to provide for their physical needs (food, water, shelter). This leads to basic supply and demand.  Beyond that, all bets are off. (Unless you actually control the money supply, but that’s a topic for another day.)

The rest what we call “economics” is an increasingly complex array of probabilities whose functions defy scientific reduction. Economic turbulence is just that, turbulence.  Throw in power politics and geopolitical imperatives and you have a complex system that defies mathematical modeling.

The bottom line (pun intended) is that no one understands the whole of it. No one can predict what will or will not happen with any degree of accuracy. Forecasts are just educated guesses. Take everything the gurus say with a grain of salt. Most of the cocky ones are selling you something. The quiet ones are busing transferring your wealth to someone else. The politically connected ones risk shaking the confidence of the populace if they’re too honest.

I don’t mean to suggest that trends can’t be identified or that the past isn’t prologue to future.  But just because every swan you’ve ever seen is white doesn’t mean that the 99th one you come across might be black.

Because of these facts, humility, not hubris, is the essential mental prerequisite for anyone interested in learning the art, not the science, of economics.

Here’s a clip from Nassim Taleb (author of the Black Swan) and Benoit Mandelbrot (inventor of fractal geometry and an expert in probability and complexity theory) from PBS.

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