this is the pea of wisdom
produced by
this NYU "pocket" school --plus NED--
a generalization i suspect undisputed by anyone
not even the blind sheik of stump ville
bob lucas
okay so
some dare not call us irrational agents
as we enter the market place
where as
gain oriented sociopathic opportunists
that label
strikes me as an adequate agent mind set a priori
for at least the professional players
able to move markets into or around corners on occasion
and of course pick up dimes in front of the racing steam rolller
translation :
yes dotty
few leave dollar bills on the side walk
err dollar bills they notice down there that is
our man in sabra shirt
comes hucking his wares :
.".. To be sure, the upswing in house prices in many markets around the country in the 2000s did reach levels that history and the subsequent long downswings tell us were excessive. But, as we show in Part II, such excessive fluctuations should not be interpreted to mean that asset-price swings are unrelated to fundamental factors. In fact, even if an individual is interested only in short-term returns—a feature of much trading in many markets—the use of data on fundamental factors to forecast these returns is extremely valuable. And the evidence that news concerning a wide array of fundamentals plays a key role in driving asset-price swings is overwhelming.[16]
Missing the Point in the Economists’ Debate
Economists concluded that fundamentals do not matter for asset-price movements because they could not find one overarching relationship that could account for long swings in asset prices. The constraint that economists should consider only fully predetermined accounts of outcomes has led many to presume that some or all participants are irrational, in the sense that they ignore fundamentals altogether. Their decisions are thought to be driven purely by psychological considerations.
The belief in the scientific stature of fully predetermined models, and in the adequacy of the Rational Expectations Hypothesis to portray how rational individuals think about the future, extends well beyond asset markets. Some economists go as far as to argue that the logical consistency that obtains when this hypothesis is imposed in fully predetermined models is a precondition of the ability of economic analysis to portray rationality and truth.
For example, in a well-known article published in The New York Times Magazinein September 2009, Paul Krugman (2009, p. 36) argued that Chicago-school free-market theorists “mistook beauty . . . for truth.” One of the leading Chicago economists, John Cochrane (2009, p. 4), responded that “logical consistency and plausible foundations are indeed ‘beautiful’ but to me they are also basic preconditions for ‘truth.’” Of course, what Cochrane meant by plausible foundations were fully predetermined Rational Expectations models. But, given the fundamental flaws of fully predetermined models, focusing on their logical consistency or inconsistency, let alone that of the Rational Expectations Hypothesis itself, can hardly be considered relevant to a discussion of the basic preconditions for truth in economic analysis, whatever “truth” might mean.
There is an irony in the debate between Krugman and Cochrane. Although the New Keynesian and behavioral models, which Krugman favors,[11] differ in terms of their specific assumptions, they are every bit as mechanical as those of the Chicago orthodoxy. Moreover, these approaches presume that the Rational Expectations Hypothesis provides the standard by which to define rationality and irrationality.[18]
Behavioral economics provides a case in point. After uncovering massive evidence that the contemporary economics’ standard of rationality fails to capture adequately how individuals actually make decisions, the only sensible conclusion to draw was that this standard was utterly wrong. Instead, behavioral economists, applying a variant of Brecht’s dictum, concluded that individuals are irrational.[19]
To justify that conclusion, behavioral economists and nonacademic commentators argued that the standard of rationality based on the Rational Expectations Hypothesis works—but only for truly intelligent investors. Most individuals lack the abilities needed to understand the future and correctly compute the consequences of their decisions.[20]
In fact, the Rational Expectations Hypothesis requires no assumptions about the intelligence of market participants whatsoever (for further discussion, see Chapters 3 and 4). Rather than imputing superhuman cognitive and computational abilities to individuals, the hypothesis presumes just the opposite: market participants forgo using whatever cognitive abilities they do have. The Rational Expectations Hypothesis supposes that individuals do not engage actively and creatively in revising the way they think about the future. Instead, they are presumed to adhere steadfastly to a single mechanical forecasting strategy at all times and in all circumstances. Thus, contrary to widespread belief, in the context of real-world markets, the Rational Expectations Hypothesis has no connection to how even minimally reasonable profit-seeking individuals forecast the future in real-world markets. When new relationships begin driving asset prices, they supposedly look the other way, and thus either abjure profit-seeking behavior altogether or forgo profit opportunities that are in plain sight.
The Distorted Language of Economic Discourse
It is often remarked that the problem with economics is its reliance on mathematical apparatus. But our criticism is not focused on economists’ use of mathematics. Instead, we criticize contemporary portrayal of the market economy as a mechanical system. Its scientific pretense and the claim that its conclusions follow as a matter of straightforward logic have made informed public discussion of various policy options almost impossible.
Doubters have often been made to seem as unreasonable as those who deny the theory of evolution or that the earth is round. Indeed, public debate is further distorted by the fact that economists formalize notions like “rationality” or “rational markets” in ways that have little or no connection to how non-economists understand these terms. When economists invoke rationality to present or legitimize their public-policy recommendations, non-economists interpret such statements as implying reasonable behavior by real people. In fact, as we discuss extensively in this book, economists’ formalization of rationality portrays obviously irrational behavior in the context of real-world markets.
Such inversions of meaning have had a profound impact on the development of economics itself. For example, having embraced the fully predetermined notion of rationality, behavioral economists proceeded to search for reasons, mostly in psychological research and brain studies, to explain why individual behavior is so grossly inconsistent with that notion—a notion that had no connection with reasonable real-world behavior in the first place.
Moreover, as we shall see, the idea that economists can provide an overarching account of markets, which has given rise to fully predetermined rationality, misses what markets really do. ...
Footnotes
16 See Chapters 7-9 for an extensive discussion of the role of fundamentals in driving price swings in asset markets and their interactions with psychological factors.
17 For example, in discussing the importance of the connection between the financial system and the wider economy for understanding the crisis and thinking about reform, Krugman endorses the approach taken by Bernanke and Gertler. (For an overview of these models, see Bernanke et al., 1999.) However, as pioneering as these models are in incorporating the financial sector into macroeconomics, they are fully predetermined and based on the Rational Expectations Hypothesis. As such, they suffer from the same fundamental flaws that plague other contemporary models. When used to analyze policy options, these models presume not only that the effects of contemplated policies can be fully pre-specified by a policymaker, but also that nothing else genuinely new will ever happen. Supposedly, market participants respond to policy changes according to the REH-based forecasting rules. See footnote 3 in the Introduction and Chapter 2 for further discussion.
18 The convergence in contemporary macroeconomics has become so striking that by now the leading advocates of both the “freshwater” New Classical approach and the “saltwater” New Keynesian approach, regardless of their other differences, extol the virtues of using the Rational Expectations Hypothesis in constructing contemporary models. See Prescott (2006) and Blanchard (2009). It is also widely believed that reliance on the Rational Expectations Hypothesis makes New Keynesian models particularly useful for policy analysis by central banks. See footnote 7 in this chapter and Sims (2010). For further discussion, see Frydman and Goldberg (2008).
19 Following the East German government’s brutal repression of a worker uprising in 1953, Bertolt Brecht famously remarked, “Wouldn’t it be easier to dissolve the people and elect another in their place?”
20 Even Simon (1971), a forceful early critic of economists’ notion of rationality, regarded it as an appropriate standard of decision-making, though he believed that it was unattainable for most people for various cognitive and other reasons. To underscore this view, he coined the term “bounded rationality” to refer to departures from the supposedly normative benchmark."
i read something like this
and i see a lot of pre fight smack talk
get in the ring and show us what you got
it ain't here
REH took three torpedos at least below the water line
and in reality sank
out there on the 7 seas now is a ghost ship
building models with plausible agent actions
is under way
but we hardly can expect a whole system simulating model yet
just suggestive pieces
that's the science
however we've known how to mobilize productive factors into greater market activity since the days of the arsenal of democracy
that we don't declare war on climate change
like we
declared war on fascism
or the japanese empire
---sandy as pearl harbor ---
but instead stag along
producing our own " welfare infamy" all by ourselves
well that's all about class politics not science
------------------
you prolly share my contempt for stevie wonder williamson
he de throwns calvo
by crying
" what about the arbitrage reachable
" side walk dollar bills "
any stuttering price makers must leave
all around themselves
the general assumption
men and gals of enterprise
if free to choose to pounce and scoop
will rapidly rationalize market outcomes
they are every where like guardian angels
of the marketsever ready and able
to reconfirm
those reassuring
ike era social welfare theorems
-------------------------------------
smart agents
that learn have clever hunches etc
roman is correct to suggest
agents are not irational apriori or a posteriori
only imperfect
get it
imperfect agents ...imperfect markets
lesson
we can do better then leave the markets to their spontaneous agents
again greenwald stiglitz etc etc
----------------
interestingly
there is a set of assumptions about agents actions
that implies a set of
a priori linear taxes and subsidies can correct all market failures
the full greenwald stiglitz
however generalizes to any set of agent actions
including ones that get nicely caught
by insurance models
agent actions that radically intensify the degree
and kind of optimal interventions
not pyrrhonism
but an awesome account of the complexity here
so its correct to suggest mechanical models will fail to capture not just the nuance but the substance of any required "instrumentalities"
and interventions
we might need
to pursue higher social welfare
------------------------
herd and rational bubble making
the drovers of the herd are not irrational
their task is to know when to break off
ie before the cliff edge
and of course
saet up a new camp at the bottom of the cliff
to collect the meat
yup
take em on the way up
and slaughter em after they fall
of course to operate with the limitless credit line of TBTF makes this all hollywood fine
