Mandelbrot Beats Economics in Fathoming Markets

It staggers me that so much prevailing thought still leans towards the idea of complex, highly connected systems as inherently stable, with their natural state as equilibrium. It dates back to the victorians, with their "All things Bright and Beautiful" view of god's creation, which was shattered by darwin. How long it takes us to learn the important lessons.<p>This view was prevalent in the world of ecology for decades, and led to all that guff about "nature's balance" and "spaceship earth" that we had to put up with for so long. It turned out that these ideas were based on falsified studies.<p>Adam Curtis addressed these ideas and more in his recent series of films, All Watched Over By Machines Of Loving Grace. Specifically, the second episode: "The Use and Abuse of Vegetational Concepts." The other episodes cover Ayn Rand and her effect on US economic policy, and the Selfish Gene theory and its murky origins in the wartorn Congo. And a whole lot of other stuff.<p><a href="http://en.wikipedia.org/wiki/All_Watched_Over_by_Machines_of_Loving_Grace_(television_documentary_series)" rel="nofollow">http://en.wikipedia.org/wiki/All_Watched_Over_by_Machines_of...</a><p>I highly recommend it, along with his other works, although you should be careful not to suspend your critical faculties in the headlights of his psychedelic filmmaking techniques.

This is a good overview, though as one minor quibble, the critique of "rational agents" is separate from the critique of equilibrium models: <i>even if</i> all economic actors are rational agents, that doesn't imply that everything converges instantly to nice equilibria with an absence of feedback loops, attractors, and the other typical nonlinear-dynamical-system pathologies. In fact most agent simulations in AI that use rational agent models still find all sorts of that weirdness going on.

I'm surprised nobody has pointed out that the Euro is a tragedy of the commons.<p>"Pooling sovereign debt absolves the most irresponsible nations from confronting their unsustainable spending by forcing more responsible nations to pick up the tab. All of the incentives are weighted in favor of irresponsibility and none to responsibility. No pie-in-the-sky plan by the EU to dictate budgets to its members will ever work. The members will either ignore such interference or, as has already happened, cook the books to make it appear that they are doing so." – From Philipp Bagus' <i>The Tragedy of the Euro</i>

This article is a straw man.<p>I don't think most economists would seriously suggest that the market lives, should live, or ideally would live in a static equilibrium. I <i>know</i> that most economists wouldn't say they can predict the fluctuations of the market. The ones that think they can, of course, get disproportionate amounts of airtime on CNBC or wherever, so it's an understandable misapprehension.

This article is pretty idiotic and yet another another attempt by new economists to try to excuse the terrible financial policies of the last 10 years under the silly and completely wrong slogan "nobody could have possibly predicted it would all turn out this way." This of course was the same excuse used for the housing crisis (even though most of the country actually predicted it) and for the Iraq debacle.<p>Take this quote "Nothing in mainstream “neoclassical” finance theory explains these persistent crises." That may be true but if so it merely reflects a weakness of neoclassical finance theory and not of our knowledge of economics as a whole.<p>In fact Keneyesian theory explains the boom and bust cycle as well as the periodic crises very well and has a pretty good solution for dealing with them. In fact we did deal with them pretty well during the postwar period of expansion and prosperity. Then of course we started progressively departing from Keneysian theory under the tutelage of the Chicago school and the crises, as if by clockwork, started intensifying and the crashes started getting worse.<p>So the answer is obvious, the theory is well known. The problem is that the new economists do not want to admit it because (i) they do not want to admit they are wrong and (ii) they sure as hell do not want the correct medicine that Keynesian theory prescribes.<p>So they go on with this ridiculous farce where they pretend that the economics crises are some unexplained phenomenon.

I'm always perplexed by the notion of trying to "model" an economy. I don't understand how aggregate statistics about a market reveal any insight into how to create sustainable value. I feel like it's similar to knowing the past winning numbers on a Roulette table, because it provides no actionable insight to future winning numbers.

For a little background on this debate: <a href="http://tuvalu.santafe.edu/~jdf/papers/farmer0606.pdf" rel="nofollow">http://tuvalu.santafe.edu/~jdf/papers/farmer0606.pdf</a>

Wait, did economists think at one point that the distribution of movements in a stock market followed a Gaussian pattern? I mean, amateur statisticians approximate things to Gaussian distributions all the time to make the math easier, but that's hardly a problem unique to economics.<p>As to the Omori distribution, have they actually succeeded in making forward looking predictions with it, or were they just fitting a model to past data? Even if it is a real phenomenon, I can think of a way to extract money from the market by making it go away off the top of my head, so I don't imagine it will last long now that it's been reported in public.<p>The parts about equilibrium models being taken too seriously are well taken, though.

It is a fast oversimplification to say that economists lose and Mandelbrot wins. Eugene Fama (<a href="http://en.wikipedia.org/wiki/Eugene_Fama" rel="nofollow">http://en.wikipedia.org/wiki/Eugene_Fama</a>) whose Phd thesis coined the concept of stock prices following a random walk simultaneously wrote about Mandelbrot distributions (<a href="http://www.jstor.org/pss/2350971" rel="nofollow">http://www.jstor.org/pss/2350971</a>).

"The (Mis)behavior of Markets" is a great read on the subject, by Mr. Mandelbrot himself.

"God doesn't play dice". And several decades later Mandelbrot discovered that God plays fractals.