Malpractice in any profession is defined as the violation of the professional standards of that profession. Given the logically fallacious foundations that underlie most of modern economics, it's questionable whether there can even be such a thing as economic malpractice. Economics, like mathematics, is an axiomatic system. In mathematics, the axioms certainly seem to be true, especially when applied to the real world. However, the axioms of economics, especially free-market economics, are false and are known by economists to be false. (For example, they assume that in a market, there are no large actors that can individually affect the overall market, and that everyone has perfect knowledge). Irrespective of the falsity of the assumptions, economists don't hesitiate to build an entire intellectual edifice based on those false assumptions. As math people, you all know what happens when you try to derive conclusions based on assumptions that are false. In the 1800's, economists wanted to make their field more scientific. So, they adopted the equations of physics, changed the names of the variables, and started putting the new equations into economics books. "Railroading Economics" by Michael Perelman talks about this. It gets worse. Even when real-world data contradicts economic theories, it it often the theories that prevail. "Naming the System" by Michael Yates talks about this. It is no wonder economics is called the dismal science. On a related note: On Bill Moyers Journal on Oct. 10, George Soros was talking about how economists assume that things will average out and self-correct. This is, of course, false. Instead, there seems to be a tendency for self-reinforcing feedback loops to occur (in both positive and negative directions), which cause exponentially fast changes to occur. Unforunately, that's often too fast for society or the political system to react. ------------------------------- rcs@xmission.com wrote:
There are plenty of folks who share blame for the current mess. The rating agencies have gotten off very lightly, and the people writing the bad mortgages certainly knew better. I've seen perhaps a dozen suggestions for "the cause". There have been boom/bust cycles at least since the Tulip Bubble, and it's possible that they actually contribute to economic progress.
It sounds as if Mr. Taleb has written some interesting books. But the notion that the real world, or the financial world, is properly measured by a gaussian distribution, has been known to be inaccurate for a long time. There's a decades old argument about whether stock prices are accurately modeled by Brownian motion. Every biostatistician knows that real people have heights and weights that include long tails. Even in the middle of the distribution, the curves can be lumpy and asymmetrical. The challenge is to figure out if using a bell curve model will still give a useful answer, and if it can be patched.
One obvious problem with investment diversification is that it fails to average out correlations among your classes: If there's a recession, most things go down, and you can't beat that unless you are allowed some minus signs (short sales) in your portfolio, or make lucky guesses about the few stocks that go up.
The Black Swan problem asks, in essense, "To what extent is the past a good estimate of the future?". We know the answer: It's usually a pretty good estimate, but sometimes it's wrong, because "things are different now". Deciding when things really *are* different is tough.
A possible solution to the short-sale balloon problem: Only allow people to loan half the stock they own. This would limit the total amount of shorted stock.
My favorite pseudo-stan was in a recent NYT editorial, perhaps by Krugman. It is of course, Richistan.
Rich
"A witty saying proves nothing." --V.