Saturday, March 27, 2010

Lo and Mueller's Need for More Scholarship

Consider Andrew W. Lo and Mark T. Mueller's draft paper "WARNING: Physics Envy May Be Hazardous To Your Wealth!", to appear in the Journal of Investment Management. They argue that economists' "physics envy" has led to "a false sense of mathematical precision in some cases", and they illustrate their argument by pointing to Paul Samuelson. They distinguish between uncertainty and risk and offer a checklist to assess the degree of uncertainty in your decision-making environment. They mention chaotic dynamics.

I find their references lacking. They don't reference Philip Mirowski, particularly his book More Heat Than Light in which he considers Samuelson. They do reference Frank Knight's Risk, Uncertainty, and Profit, but not Keynes. They do not reference G. L. S. Shackle and his role on the development of scenario planning. No reference to Joan Robinson appears. I think her 1974 paper "History vs. Equilibrium", with its distinction between logical time and historical time, is particularly apropos. Paul Davidson's 1982 JPKE paper, "Rational Expectations: A Fallacious Foundation for Studying Crucial Decision-Making Processes" is also of some importance, with its emphasis on the mainstream economist's assumption of ergodicity. J. Barkley Rosser, Jr., with his treatment of insights from complex dynamics, is also unreferenced.

I don't see why one would want to read Lo and Mueller until they engage some of this literature on their point.


Anonymous said...

Samuelson, in an article in 1969, argued economists must impose the "ergodic hypothesis" [ i.e., the future is statistically predicable from past data], if we are going to move economics from a study of history into a science. And Samelson specifically noted he used the term "ergodic" as it is used in statistical mechanics!! Talk about "physical envy".

Paul Davidson

Robert Vienneau said...

Paul, if mainstream economists would actually reference you when writing about the topics in which you have advanced the field, more mainstream economists might actually look at your policy proposals, which would be a good thing. I still haven't read this book because it came too soon after this one. I trust it has suggestions for a reformed Bretton Woods, which the world seems to need now.

Philibert Kongtcheu said...

I am also very critical of the value of this paper, but for different reasons. See:
Phil K.