By George Washington of Washington’s Blog.
As I have repeatedly noted, mainstream economists and financial advisors have been using faulty and unrealistic models for years. See this, this, this, this, this and this.
And I have pointed out numerous times that economists and advisors have a financial incentive to use faulty models. For example, I pointed out last month:
The decision to use faulty models was an economic and political choice, because it benefited the economists and those who hired them.
For example, the elites get wealthy during booms and they get wealthy during busts. Therefore, the boom-and-bust cycle benefits them enormously, as they can trade both ways.
Specifically, as Simon Johnson, William K. Black and others point out, the big boys make bucketloads of money during the booms using fraudulent schemes and knowing that many borrowers will default. Then, during the bust, they know the government will bail them out, and they will be able to buy up competitors for cheap and consolidate power. They may also bet against the same products they are selling during the boom (more here), knowing that they’ll make a killing when it busts.
But economists have pretended there is no such thing as a bubble. Indeed, BIS slammed the Fed and other central banks for blowing bubbles and then using “gimmicks and palliatives” afterwards.
It is not like economists weren’t warning about booms and busts. Nobel prize winner Hayek and others were, but were ignored because it was “inconvenient” to discuss this “impolite” issue.
Likewise, the entire Federal Reserve model is faulty, benefiting the banks themselves but not the public.
However, as Huffington Post notes:
The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.
This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed’s thrall, the economists missed it, too.
“The Fed has a lock on the economics world,” says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. “There is no room for other views, which I guess is why economists got it so wrong.”
The problems of a massive debt overhang were also thoroughly documented by Minsky, but mainstream economists pretended that debt doesn’t matter.
And – even now – mainstream economists are STILL willfully ignoring things like massive leverage, hoping that the economy can be pumped back up to super-leveraged house-of-cards levels.
As the Wall Street Journal article notes:
As they did in the two revolutions in economic thought of the past century, economists are rediscovering relevant work.
It is only “rediscovered” because it was out of favor, and it was only out of favor because it was seen as unnecessarily crimping profits by, for example, arguing for more moderation during boom times.
The powers-that-be do not like economists who say “Boys, if you don’t slow down, that bubble is going to get too big and pop right in your face”. They don’t want to hear that they can’t make endless money using crazy levels of leverage and 30-to-1 levels of fractional reserve banking, and credit derivatives. And of course, they don’t want to hear that the Federal Reserve is a big part of the problem.
Indeed, the Journal and the economists it quotes seem to be in no hurry whatsoever to change things:
The quest is bringing financial economists — long viewed by some as a curiosity mostly relevant to Wall Street — together with macroeconomists. Some believe a viable solution will emerge within a couple of years; others say it could take decades.
Saturday, PhD economist Michael Hudson made the same point:
I think that the question that needs to be asked is how the discipline was untracked and trivialized from its classical flowering? How did it become marginalized and trivialized, taking for granted the social structures and dynamics that should be the substance and focal point of its analysis?…To answer this question, my book describes the “intellectual engineering” that has turned the economics discipline into a public relations exercise for the rentier classes criticized by the classical economists: landlords, bankers and monopolists. It was largely to counter criticisms of their unearned income and wealth, after all, that the post-classical reaction aimed to limit the conceptual “toolbox” of economists to become so unrealistic, narrow-minded and self-serving to the status quo. It has ended up as an intellectual ploy to distract attention away from the financial and property dynamics that are polarizing our world between debtors and creditors, property owners and renters, while steering politics from democracy to oligarchy…
[As one Nobel prize winning economist stated,] “In pointing out the consequences of a set of abstract assumptions, one need not be committed unduly as to the relation between reality and these assumptions.”
This attitude did not deter him from drawing policy conclusions affecting the material world in which real people live. These conclusions are diametrically opposed to the empirically successful protectionism by which Britain, the United States and Germany rose to industrial supremacy.Typical of this now widespread attitude is the textbook Microeconomics by William Vickery, winner of the 1997 Nobel Economics Prize:
“Economic theory proper, indeed, is nothing more than a system of logical relations between certain sets of assumptions and the conclusions derived from them… The validity of a theory proper does not depend on the correspondence or lack of it between the assumptions of the theory or its conclusions and observations in the real world. A theory as an internally consistent system is valid if the conclusions follow logically from its premises, and the fact that neither the premises nor theconclusions correspond to reality may show that the theory is not very useful, but does not invalidate it. In any pure theory, all propositions are essentially tautological, in the sense that the results are implicit in the assumptions made.”Such disdain for empirical verification is not found in the physical sciences. Its popularity in the social sciences is sponsored by vested interests. There is always self-interest behind methodological madness. That is because success requires heavy subsidies from special interests, who benefit from an erroneous, misleading or deceptive economic logic. Why promote unrealistic abstractions, after all, if not to distract attention from reforms aimed at creating rules that oblige people actually to earn their income rather than simply extracting it from the rest of the economy?
As I have previously written, mainstream economists and financial advisors who promote flawed models are not necessarily bad people:
I am not necessarily saying that mainstream economists were intentionally wrong, or that they lied because it led to promotions or pleased their Wall Street, Fed or academic bosses.
But it is harder to fight the current and swim upstream then to go with the flow, and with so many rewards for doing so, there is a strong unconscious bias towards believing the prevailing myths. Just like regulators who are too close to their wards often come to adopt their views, many economists suffered “intellectual capture” by being too closely allied with Wall Street and the Fed.
As Upton Sinclair said:
It is difficult to get a man to understand something, when his salary depends upon his not understanding it.
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But economists are amongst the new priests, who give legitimacy to the the oligarchs of our era. I have written about it.. maybe more in the future.
http://dissention.wordpress.com/2009/12/12/the_new_priests_01/
I was glad to see Hudson’s smackdown of the supercilious Krugman, who could barely contain his disdain for the uncouth radical daring to criticize the majestic Samuelson.
Krugman couldn’t even bring himself to write Hudson’s name, but just linked to the anonymous post. (Of course K is always very respectful of anyone properly ensconsed in the Establishment, even where he disagrees with them.)
Quite the contrast with his protests over how he and others who were correct on Iraq remain marginalized on that subject.
If you liked Hudson’s “smackdown”, you’d love L.Randall Wray’s comprehensive demolition of Krugman’s position here:
http://neweconomicperspectives.blogspot.com/2009/12/krugman-gets-it-wrong.html
Well, you know, I appreciate a healthy debate, but if you think this is a “demolition,” you were predisposed to a certain way of thinking long before reading this piece.
First of all, referencing Keynes’s “publication date” is especially spurious, as anyone who has published knows what a long time can occur before deciding on a theory and then having it published. The idea that Keynes had no impact at all prior to a publication date is an assumption likely not grounded in reality.
Second of all, solely because certain of Samuelson’s ideas were later discredited does not necessarily impugn his advancement of the discipline. I think if we read Aristotle and Plato closely, we could probably find one, or maybe two, inaccuracies as well. I doubt many find those two men dispensable, however.
I personally am skeptical of Samuelson and Krugman and their ideas, but this is not a “demolition” and referencing it as such shows you are an ideologue no better than they. Of course, that just makes you no different than at least 99.99999% of humanity (me included).
With all due respect, I do not think anyone’s ideas are beyond reproach, but the belief that you can demolish people (not to mention their “comprehension”) who are as smart and complex as Keynes, Samuelson and Krugman in nine paragraphs or less is … really … I lack non-curse words for it.
What Wray demolished wasn’t the entire corpus of Prof. Krugman’s work (or Samuelson’s for that matter), it was his remarkable claim that “Samuelson-type economics” had saved the world from the Depression while Institutional economists were floundering.
As far as dates are concerned, it’s true that policies aimed directly at increasing employment were experimented with (in both the US and UK) before the appearance of the “General Theory”. Wray says that these policies (in the US) reflected the ideas of institutional economists. I think you are implying that they were inspired by Keynes. It’s possible that you are both right, if the institutionalists of the late 1920s/early 1930s had been following Keynes’ work. I don’t have a copy of Skidelsky’s book on Keynes, but I see that the Wikipedia article on Keynes says: “…according to Skidelsky, the consensus is that Keynes efforts only began to have a more than marginal influence on US economic policy after 1939”.
http://en.wikipedia.org/wiki/John_Maynard_Keynes#In_the_1920s
Re-reading both Prof. Krugman’s piece and L.Randall Wray’s reply, I’m struck by Prof. Krugman’s curious use of the phrase “Samuelson-type economics”. He says: “So Samuelson-type economics didn’t win because of its power to cloud men’s minds. It won because in the greatest economic crisis in history, it had something useful to say”. Since Samuelson was still an undergraduate when FDR was inaugurated in 1933, this is a pretty odd thing to say. I suppose Prof. Krugman meant “Keynesian economics”, but why use such a strange reference?
Thanks, that was good. Minsky’s truth should be evident to anyone who understands reality (or even who has ever studied dialectics), and yet these neoclassical economists have been as exactly 180 degrees wrong as can be imagined, and not even just because their paychecks depended upon it.
They really are insane.
Reading these reminds me of John Bellamy Foster’s depiction of the bastard Keynesians and Krugman in particular wanting to enshrine neoclassicism as the real theory while relegating the real Keynes to being the “special case” (a neat inversion counter to the evidence of reality).
http://www.monthlyreview.org/090302foster.php
Attempter, thanks for the link. It’s a pity we’ve heard so little from the Marxists, but I suppose given the state of the economics profession, the media, etc., etc., it’s not surprising.
Yeah. In the MSM Krugman himself counts as a hard core left “liberal”.
“Yeah. In the MSM Krugman himself counts as a hard core left “liberal”.”
That fact tells you that it is not just economists and financial advisors that are the problem. The corporate media, comprised of similar to Krugman sell outs, have made Krugman what he is.
The wealthy ruling elite have been buying and using sell out shills, in all fields (boxes) including; the media, physical sciences, unions, religion, politics, etc., to deceive others and deflect from their real world exploitation and oppression for centuries now. Its basic propaganda — advertising on roids — relate, spew the deceptions (demonize, deflect, dazzle, deceive, etc.) and stimulate to action.
Positive change will never come until the energy dissipating walls of the boxes are knocked down and the commonality of co-opting and hijacking in all of them is revealed, especially the scam electoral system.
Deception is the strongest political force on the planet.
The powers-that-be do not like economists who say “Boys, if you don’t slow down, that bubble is going to get too big and pop right in your face”.
This warning would properly go unheeded, because that bubble didn’t blow up in their face. It blew up in our face.
But Vickery was one of the last of the old radical full employment Keynesians. He won his Bank of Sweden prize just weeks before he died for some contributions to auction theory that he himself regarded as relatively trivial. So the citation of him is actually making the same point about the relative triviality of much economic theory.
And I don’t know enough about Vickery to say he expressed “disdain” for empirical verification. The passage simply makes a precise technical point, which philosophers, logicians, and mathematicians will easily recognize as such. By itself, it’s not more than that. If Vickery had dismissed “soundness”, well, that would be a problem ….
Some more excellent Hudson: http://neweconomicperspectives.blogspot.com/2009/12/lost-science-of-classical-political.html
I especially liked the description of how the “no free lunch” slogan, so institutionalized by now, was actually a totalitarian inversion Big Lie, that denying there’s such a thing as a free lunch was a ploy to defend the free lunchers.
It comes through loud and clear that e.g. Smith and Marx had more in common than e.g. Krugman has with either, and that Krugman is closer to Friedman than his is to either.
The fundamental struggle isn’t between real capitalism and real socialism but between the rentier and everyone else.
As we see today, every issue boils down to, is one for or against corporatism.
Ummm, let me see if I can follow the logic here. You’re using arguments presented by academically trained economists (Simon Johnson, William Black, Michael Hudson) made against other academically trained economists to suggest that all academically trained economists have incentives to use faulty models. So which ones are bought and sold by the Fed and why didn’t the Fed buy off the other ones?
If economists can ignore the everyday world, they should be Zen monks.
framed,
individual data points (e.g. economists) do not disprove a hypothesis. try harder.
Uncle Billy, is that you?
It amazes me how economists can look at the real world and stay in their bubble. The reality is that we are in tough times with people losing their jobs everyday. It’s disheartening to think that they don’t see what is really going on in America.
Q: If you threw 10 economists off the roof of a tall building, would they hit the ground?
A: No, they’d fall gently until they reached equilibrium.
Boowhahahahahahah!
Q: How many economists does it take to spot a bubble?
A: I don’t know, we’re still counting.
Boowhahahahahahah!
Q: What happened when they replaced God with an economist?
A: All hell broke loose.
Bowahahahaha hahahahah ahahah!
Q: Why did the out-of-work economist starve to death when the Church down the street was handing out sandwiches to the homeless?
A: Because he didn’t believe in a free lunch.
Not funny.
Q: How can a fool with demonstrably only half a brain win a Nobel Prize for Economics?
A: Because empiricism is irrelevant.
Uggh. That’s a real Geek joke.
Bowa hahaha hahahah ahahahaha !
Well, Andrew Foland beat me to it, “The powers-that-be do not like economists who say “Boys, if you don’t slow down, that bubble is going to get too big and pop right in your face” I will allow government officials some slack, because who gets elected saying we really need to slow the economy down? But on the other hand, it is their job – they’re suppose to be leaders, not pop stars.
I remember, not so long ago, the miracle hormone estrogen, and how it just seemed common sensible and proved by research that this stuff prevented all manner of problems in post menopausal women. But medicine, though far short of real science, has enough familiarity with skepticism, evidence, and reality to discover that this treatment rested on a foundation of supposition, hope, and desire.
It seems to me there is a great deal of similarities between medicine and economics – an awful lot of theory demonstrably false. But economics seems to have a religious belief in its premises.
No wonder that an economist like Steve Keen is practically unknown in the US.
He can’t swallow the Kool Aid, since his allergy to BS is rather high.
You know you’re getting old when a post like this reminds you of the book Theodore Roszak edited in 1967 – “The Dissenting Academy” – and particularly the essay on economics and economists, “Keynes Without Gadflies”, by S. Rosen. It’s not that we’ve been here before, it’s that we’ve been here continuously for 40 years.
Is this an example?
http://www.time.com/time/specials/packages/article/0,28804,1946375_1948023_1947253,00.html
No, on your house. Do you have a mortgage?
Bernanke: Oh, yes, we refinanced.
Oh, perfect. When?
Bernanke: About 5%. A couple of months ago.
Good time.
Bernanke: Yes. We had to do it because we had an adjustable rate mortgage and it exploded, so we had to.
Just the sort of sweetheart I want controlling our economic destiny :)
Endless economists reputations discussion when the the thrust of the post is that the elite rich exploit both boom and bust. Manufacturing hardship for the engine of economies. Those who actually produce value.
Here’s economic reality – Desperation is setting in:
http://truthingold.blogspot.com/2009/12/desperation-is-setting-in.html
Today’s scientists have substituted mathematics for experiments, and they wander off through equation after equation, and eventually build a structure which has no relation to reality.
– Nikola Tesla
Part of the problem is the intellectual foundation of economics which is to mimic the science of physics in using mathematics. This gives the patina of rigor and basks in the warm glow of success generated by scientist with their actual real world contributions firmly grounded in equations that lead to real world applications, like Einstein and the bomb. The problem is that economics is not dealing with atoms and molecules or elements and compounds with relatively simple and clear properties that can cataloged and predicted. Formal organizations and the larger social order do not have clearly identified principles such as gravity, the 2nd law of thermodynamics. Yet, we hear about social forces, as if this is more than a literary metaphor, with a real operational definition or any measurable evidence. Much less a theory with the ability to predict or explain what is going on. The complete lack of agreement by so many economists and nations over what is the real path to take as a society after so many years of what should be some emerging consensus as to what makes sense for humanity should be the biggest tip off to the purely apologetic role of economists and the ideological nature of their enterprise by and large.
Paul,
Great Comment.
I started reading Moral Sentiments and Material Interests by Herbert Gintis et al last night, and your comment reminds me of a quote by Murray Gell-Mann they cite:
“Physics would be a lot harder if particles could think.”
Classical and neoclassical economic theory I believe will eventually meet a fate similar to what the geocentric model or the Ptolemaic worldview did. It was the telescope that doomed the idea that the Earth is the center of the universe and other objects go around it. Likewise, as new instruments are developed that allow us to observe the actual workings of the human mind, I think it is becoming rather obvious that Classical and neoclassical economics have about as much basis in factual reality as the Garden of Eden or the belief that the world is 5000 years old.
In physics particles may be able to think. They seem to know when someone is looking for them, they are never where they are supposed to be. It gets even weirder when they are proven to be in a state, but you can’t measure it.
http://en.wikipedia.org/wiki/Uncertainty_principle
In my very unprofessional opinion its the same thing on a different scale. You can take all sorts of observations on the behavior of a group of particles, but try to extrapolate that to a single particle, and it doesn’t work.
http://en.wikipedia.org/wiki/Measurement_problem
The difference is that physics admits this.
I like the last sentence. What are we to do? Is there a best way to order our societies? I often wonder why it is that the study of political economy has become econometrics. Is it slough, simple laziness? The rigor of the equation is seductive; but, does the equation really represent the dynamic system that is economic activity?
What has not happened in our universities is that the study of the full dialogue of economics has been eschewed for something a bit easier to teach. Something a bit easier to quantify. Conflicting theories have not been reconciled, they have been converted into slogans for an agenda. Go to one school and the agenda is markets, another its monetarism, another its keynesianism.
As a society we need to address what it is that we want to achieve. Shall it be some form of social democracy? Shall it be some form laissez-faire capitalism? Shall it be some form central planning?
We would do well to begin by examining the contemporary nexus of the economic transaction, money. Next should be considered the banking system, after that we should focus on the system of intermediating savings and investment monies into productive enterprises and speculative exercises. As we consider these elements it may develop that we will want to have rules, a body of laws that define the limits of conduct and which laws provide for redress.
I would begin the politcal considerations with a revisitation to the Constitution and the Federalist Papers. These are documents that have remarkable relevence in today’s circumstances.
But then everyone in this country has been subjected to the incessant beating of the drum of democracy. We are a democracy is the chant. Well friends, this nation was not conceived as a democracy, it was conceived as a Federal Republic that would employ democartic means to establish representation. Why the drum beat? It’s easier to teach, its popular.
What lies before is not amenable to a popular resolution. We have been profilgate and the bill is coming due. Let us pray that we can find a resolution without the resort of a revolution.
Paul Tioxin: “Part of the problem is the intellectual foundation of economics which is to mimic the science of physics in using mathematics.”
It’s worse than that. Anyone who uses terms like axiom and theorem fancies themselves a mathematician. I’ve never heard those terms used in physics or any other hard science. An axiom by definition is an assumption, and real scientists don’t make assumptions except as an intermediary step subject to later empirical verification. Flunk the empirical verification step and your theory and your “axioms” wind up in the trash. Lumineferous Aether anyone?
Now math is great stuff, but it is definitely _not_ science (unless your thinking is rooted in the 19th century). Internal consistency is the acid test of math, not science. So whay are economists acting like cut-rate mathematicians instead of scientists?
Profits were privatised and losses are socialized on an unprecedented scale, and the commentariat worries about the babbling of the priests of the Church of Moneychangers?
And I have pointed out numerous times that economists and advisors have a financial incentive to use faulty models.
Of course. This is the funny thing about economists. They stress over and over (correctly, IMHO) that “incentives matter,” and yet don’t admit that their incentive is to whore themselves out to the rich and powerful.
GREAT COMMENTS. Thanks people.
Some in the Akademy are proposing solutions, coming from the *heterodox* camp.
Pluralism anyone?
http://mpra.ub.uni-muenchen.de/15691/
The Economists of Tomorrow
Freeman, Alan (2009): The Economists of Tomorrow. Unpublished.
It outlines a code of conduct for economics, in the form of a pluralist benchmark for Quality Assurance in economics education. This is a necessary corrective to the publicly-recognised failure of economics in the face of the 2008 crisis, which Colander et al (2009 term its “systemic failure”. This systemic failure is analysed as a consequence of the regulatory capture of the academic profession of economics, arising from and institutionalised by its present peer ranking procedures.
Pluralism is the necessary antidote. It affords two decisive benefits: it produces good economics and better economists.
[snip]
First of all, the wealthy typically lose the most during the busts. Second of all, banks are definitely not coming out ahead as a result of the crisis. Granted, Goldman Sachs has seemingly benefited from the crisis, but that is about it. Make no mistake about it: Bear Stearns, AIG and Wachovia were insolvent, i.e., they were worth negative value. Sure, the Fed bailed them out, but realize that their equity holders were wiped out, so all that means is they kept the banks alive in an attempt to return our capital markets to stability. Countless regional and community banks have failed. Buying up a competitor that does not have enough assets to pay its debts is not exactly something to be happy about.
That being said, are there a couple thousand employees that still have well-paying jobs only because the government bailed out their respective banks? Sure. Is this unfair? Of course it is. However, the financial industry is somewhat unique in that it is innately vital to our economy. While it may make some people angry, unfortunately bailing out the banking system was entirely necessary to avoid futher destruction.
“banks are definitely not coming out ahead as a result of the crisis”
If they’re alive they’re ahead of where they should be (i.e. in a capitalist economy).
“the financial industry is somewhat unique”
Don’t qualify a superlative.
“it is innately vital to our economy”
You mean like food, electricity, oil & gas, etc., etc. That ain’t my idea of “unique” (even somewhat). The unusual characteristic of the financial industry is its need for regular bailouts.
“bailing out the banking system was entirely necessary to avoid further destruction”
Yes, “banking system”, not individual banks. Which is why banks are subject to receivership. In fact Federal law not only permits it, but requires it. But why should the “regulators” of the Masters of the Universe worry about a silly thing like federal law?
Insolvent bank? Take it into receivership, wipe out the shareholders, give the bondholders a haircut, fire the top management, and keep the rest of the operation going. It ain’t an original formula, but doesn’t seem to apply if you’re TBTF and have previously purchased the US government.
Economists, almost without exception, are cowards, even when shown empirical evidence invalidating fundamental economic theories, they run away and hide, being little more than highly paid shills, supplying high-powered intellectual cover for the egotistical schemes of those in political and financial power.
The future is unpredictable. This is because in life there is that little thing called chance. And randomness. The intrinsic value of a public stock, and thus its price, represents the future cash flows that the company is projected to earn, discounted to today’s values.
Blaming the recession on economics is like blaming Hurricane Katrina on the local weatherman. Financial economics utilizes models based upon physics, calculus and statistics to provide insight into our economy and into market determinants of stock values. Assumptions inherent in any mathematical model are clearly identified specifically for the very reason that they are likely to contain notions contrary to reality. Such assumptions are presented not because economists believe them to be accurate reflections of reality but because they are necessary to formulate the model. Black and Scholes did not believe volatility was constant. Rather, they formulated a model that calculated the value of a derivative in a world where volatility remained constant. The value lies in the insights gained in analyzing the relationships between the variables in the functions. Take the laws of supply and demand. Such laws exist only when certain assumptions are made, even when such assumptions (e.g., the absence of transaction costs) clearly deviate from reality. The result is a clear and concise model, one that allows us to better understand financial markets and consumer behavior.
Both history and market prices observed for derivatives imply stock price distributions with greater probabilities for market crashes than is indicated in the lognormal distribution stock prices are assumed to follow in the B-S model. Financial economists are aware of such observations (because they discovered them) have tweaked the Black-Scholes formula over time, allowing volatility to vary, both randomly and as a function of time. Such models are non-linear and incorporate the possibilities of a liquidity crisis and resultant flight to safety behaviors accompany such crises.
The notion that financial economics allows for the prediction of market bubbles is ridiculous. Indeed, by definition, a bubble results only a sharp decline or popping of the bubble proves that asset prices were previously overvalued. If economists had such predictive ability, then they would all be extremely rich (consider a strategy whereby said economists determine there is an asset bubble–they would then short stocks which are overvalued, profiting when the bubble bursts as they predicted; alternatively, given they can predict bubbles, they can thus predict when there is not a bubble, affording them the opportunity to “buy low”).
Stock prices are not modeled as following a random walk, contrary to the countless claims made by journalists jumping at the bit to prove they don’t need a Ph.D in Microeconomics to prove a Ph.D in Microeconomics wrong. Stocks are not random–investors have a herd mentality, they say, not realizing that volatility and liquidity premiums embedded in a stock incorporate such obvious movements. Further, stocks are not assumed to move completely at random. There is a randomness component attributed to stock prices (again, such is life), but it is one of many factors and is one which has parameters. Prices are concentrated around the mean, dispersed based upon their volatility (which itself has its own stochastic process), and the mean can have direction/drift.
The discussion of stock price movements above sounds very erudite, perhaps especially to those who haven’t earned a Ph.D. in finance, however, it is all based on the assumptions of the Rational Expectations Theory (RET) and the Efficient Market Theory (EMT) which I empirically show to be incorrect. Consequently, many long-standing economic theories that rely on the RET and EMT require rethinking, including the Black-Scholes option pricing model.
“The discussion of stock price movements above sounds very erudite”
Not really. Sounds like fancy language that’s only making the first points anybody should understand before even being allowed near a mathematical model: check your assumptions and ensure that in you’re in a domain where the model works. Well duh.
In my line of work (electronics) anybody who designs something that blows up and defends themselves by saying that the model was correct is called a “useless idiot”. Anybody who simply ruminates over the internal consistency of the model instead of seeing why it didn’t apply to their real world problem is said to be indulging in “mathematical masturbation”. The first term is also applicable.