Rob Johnson of INET interviews Amar Bhide, an old McKinsey colleague and author of the book A Call for Judgment. From the introduction to this video:
The Professor of International Business at the Fletcher School of Law and Diplomacy criticizes the tendency in many quarters to rely on mathematical models to inform investment decisions. It’s that overreliance on models that tend to generalize and simplify that helped drive the world into the global financial crash of 2008 and the ensuing Great Recession. Bhidé makes a strong case that human actors need to immerse in the details of individual cases and weigh many different factors to come up with tailored decisions that more closely apply to the complexities of the real world. Bhide also argues that regulators need to take a similarly human-centered approach.
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“The Professor of International Business at the Fletcher School of Law and Diplomacy criticizes the tendency in many quarters to rely on mathematical models to inform investment decisions.”
Actually, he’s not criticizing “investment decisions” but speculation. The actual tendency in many quarters is to rely on mathematical models to inform speculation.
Spending money in the secondary debt and equity markets is speculating, pure and simple. To accept any other framing of the activity is to perpetuate the lie that covers up the central role of financial speculators in causing financial crises. Whether you’re an Austrian employing the “malinvestment” euphemism or a neoclassical economist employing the “investment” euphemism, you’re a liar.
Just stop it already.
A human-centered approach is to start speaking the truth. You can’t serve humanity by making the world safe for speculators.
Tao,
as usual, you hit it on the head-“speculators”..
Here we put a good example of a long running intellectual conflict, the battle between the two cultures as CP Snow put it. Science vs Humanities. And of course more relevant to us, within the social sciences, a question of methodologies. The past is the realm of history, but what of the present? How did we get to economics, sociology and political science when they are all measuring society? We live in an economy, a culture and a nation at the same time. We came to think in these terms due to the triumph of the 19th century liberal world view in the universities of Europe and the USA. Furthermore, it was the established discipline for objective knowledge to pursue empirical, inductive methods that would lead to general scientific laws. This can be contrasted with disciplines that recognized the uniqueness of social phenomena. The goal in the humanities was to gain knowledge without resorting to discovery of universal laws.
However, in the open market of ideas and advising, the patrons of the social sciences, the policy eating politicians and the insight seeking smart money investor and the generals who wanted a bigger bang than the enemy, all sought the best, most objective and hence scientifically derived information upon which to decide.
FROM P. 6-7 IMMANUEL WALLERSTEIN’S WORLD SYSTEM ANALYSIS:
“…WHERE SHOULD ONE FOCUS THE STUDY OF CONTEMPORARY PHENOMENA? …social scientists were located in the same 5 primary countries as historians(USA, UK, ITALY, FRANCE, GERMANY) and in the same way studied primarily their own countries…. But in addition.. social scientists put forward a methodological argument to justify this choice. They said the best way to avoid bias was to use quantitative data and that such data was most likely to be located in their own countries in the immediate present. Furthermore, they argued that if we assume the existence of general laws governing social behavior, it would not matter where one studied the phenomena, since what was true in one place and at one time, was true in all places and all times. WHY NOT STUDY PHENOMENA FOR WHICH ONE HAD THE MOST RELIABLE DATA-THAT IS , THE MOST QUANTIFIABLE AND REPLICABLE DATA? ”
Human behavior has many familiar and similar attributes. But one of them does not seem to be how is the best way to construct a social order. Or an economic system. If bridges collapsed as much as economies, no one would cross them for fear of uncertainty. Engineers around the world can agree on the properties of steel and other materials when designing a bridge without much controversy. The periodic table of elements has seen to that as well as over a century of experience in construction. Financial advisers, economic councils and others who talk and predict the course of money, interest rates, employment and so on, seem to not have found as firm a footing as we would like. Good data, sound info and logical models to run it all through makes sense, but not if you ignore the culture, or the politics. Human judgement in a qualitative mode of scholarly observation and accumulated understanding, in addition to statistical abstracts, would yield more than what the senses tell us reduced to an algorithm.
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Science vs Humanities.
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It takes a heap o’ livin’ in equations befo’ you know which mathematical model to use for which real universe situation that U studying
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‘The Professor of International Business at the Fletcher School of Law and Diplomacy criticizes the tendency in many quarters to rely on mathematical models to inform investment decisions. It’s that overreliance on models that tend to generalize and simplify that helped drive the world into the global financial crash of 2008 and the ensuing Great Recession’
Has he been channelling Nassim Taleb or vice versa?
First, thanks Yves for posting this. Two brilliant, decent people talking about a very important subject.
A thought added: It is often inplied that practitioners somehow “believe” in their models or the assumptions underlying the models. Now, I have found people, especially academic economists who really do. But the major part of bankers, especially the ones further up the career chain are not so interested about models. The clever ones know that the risk models are mostly BS but very useful BS as they give them a way out when their trading books run wrong- look, 99,5% safe. The same with a rating – look, AA rating – how could I have known?
Basel II was about banks levering up and taking human judgment (or at least responsibility) out the bonus game. The model is not about truthseeking – it is the “get-out-of-jail-card”.
As long as regulators and judges accept this phony science and do not want to look at the underlying facts, these models will therefore not be abandoned.
A pity only that Western civilization blows up because most people, especially the ones in finance, can not get “enough”.
“The same with a rating – look, AA rating – how could I have known?
Basel II was about banks levering up and taking human judgment (or at least responsibility) out the bonus game. The model is not about truthseeking – it is the “get-out-of-jail-card”.”
Exactly. Rerun of the “Befehl ist Befehl” (“superior orders”) defence, but in finance. Blind compliance has ended up as a very highly rewarded activity.
The discipline of economics is increasingly being described as a fundamentalist religion.
I think a more apt description, however, might be that it is like black magic.
Economics shares with both religion and black magic a strong reliance on the supernatural. However, black magic has as its explicit and sole intent the commission or facilitation of evildoing. The intent of religion is more ambiguous. Therefore economics every day looks more and more like black magic, and less and less like religion.
Mathiness. That’s the Western world we live in.
What is this? Comedy hour on Naked Capitalism? Gotta really wonder why the sheep can’t see a blade’s a blade. Almost makes me feel guilty. ;)
Sincerely yours,
-John E. Cash, PhD, CFA, LLD, LLC, AAA, AA, BYOB
The great physicist Niels Bohr often referred to the conflict between clarity and truth. Meaning that by simplifying a situation you can obtain a clear picture, but in doing so you lose the truth. Models are simplifications and therefore only a reflection, many times a pale one, of the truth.
Einstein restated this as, “Simplify but don’t make it simple”.
I think about that quote almost every other day in a variety of endeavors.
My recollection (which may be wrong) is that it came in the context of his advice to young physicists and it was:
“Make things as simple as possible, but not simpler.”
I stand corrected. :)
I recall reading a mathematical analysis of the number of live chickens that could be packed into given shipping space which began “We assume the chicken to be a perfect sphere”. Need I say more?