Many may be sick of hearing his name, but I think Taleb's view that randomness is at the heart of financial activity (along with many other facets of our lives) has some staying power in addressing the appearance of rare financial crises.
A theory predicting when something will/will not happen, accurately and consistently is doomed to failure. A theory predicting that something will happen, without specifying when, can be correct but is almost completely useless.
It's a good bet that any scheme involving infinitely rising asset prices, derived by extrapolating rising asset prices, is a bubble and will come crashing down. Predicting when it will come crashing down is a bit harder. It's possible with various sources of insider information of course, but that's less of a theory and more of an early warning that the hull has been breached and the ship is about to go down.
We can reasonably require of any theory of financial crises that it allow us to identify when a bubble is forming. And when one is not forming. What we cannot do is expect it to predict when the necessary random event will cause the bubble to burst. At most, it may identify what kind of event will burst the bubble.
Someday, someone may manage to come up with a theory which not only allows forming bubbles to be identified, but also shows how to deflate them early. Without producing serious political repercussions as a result. That gal gets the Nobel Prize by acclimation!
Parts of theories will be right. Those parts that are right will be - eventually - incorporated into policy which can eliminate those failure modes. Take, for example, the growth of Monetarism out of the "ashes" of Keynsianism.
But this then exposes other failure modes that have never been seen before. People will keep kiting up financial instruments until a crash occurs. If infection does not get you, cancer does; cure cancer? Alzheimers. But Entropy will have its way with you...
In this case, it was Bad Modelling Assumptions and we don't need a theory for *that*.
No theory will ever survive, but not I think for the usual reasons generally stated.
Different schools have different theories about what causes recessions. The standard keynesian story is that inventories build up, of companies make a lot of stuff that noone wants to buy. The Austrian one is (I think) that specualtors finance long term with short term liabilites, which blow up from time to time. The neo classical type, who believe in 'rational' investors kind of think that recessions are kind of impossible, but I think that is where one can find the answer.
What 'rational' in this case means, is just intelligent. If people are always 'rational' ,they are thus always 'intelligent', they don't screw up. This doesn't describe the humans that live on the planet Earth as far as I can see. Recessions happen when too many people screw up at the same time. Sometimes it's the guy at the Fed, sometimes it's Congressmen, sometimes it's Wall Streeters, sometimes it's commercial bankers, or as in the current case sometimes it's all at the same time.
Per a theory of financial crises, such a theory would be a theory about how people go about screwing up, that they screw up in a predictable and recurring fashion. I think such a theorist is selling human creativity short, humans are creative problem creators, and I don't think it's quite possible to predict exactly what they'll do to screw things up. Therefore the answer is no.
Just to add one more ingrediant to the cocktail that's being drank right now... how about the traction the EMH has gotten in the past few years. Cannot let the economics professors off the hook. The EMH can only work if noone believes in it.
If followed, the right theory will never come in contact with the enemy, because it will tell policy makers how to avoid such contact. Milton Friedman's theory on monetary policy took hold in the 80's and have been the basis of world monetary policy ever since. No one is discarding Milton Friedman's monetary policy theories because of this crisis. In fact, all policy makers are building their bailout policies in accordance with that theory because of its strength. So, if his theories are so sound, why did the theory come in contact with the enemy? Because his theories on government fiscal policy have been ignored for 70+ years, and to be fair his theories on government fiscal policies while strong are more ideological rather than based upon a theoretical framework. Economists need to provide a strong theoretical framework which shows that Milton Friedman's views on government fiscal policy are theoretically just as strong as his theories on monetary policy.
There are different levels of Efficient Market Hypothesis
Strong: The market is always right, there are no bubbles, nothing is ever over bought or oversold. Easy to disprove, very hard to find anyone who believed it in the first place.
Medium: The market cannot be predicted. Nobody will make money by predicting what the market is going to do. To put it another way, you are not smarter than 5000 professional money managers. If you are, where is your billion dollars?
Medium short term: You can predict that cocacola will earn lots of money over the next 20 years, but you can't predict what the price will be next week. If you can, where is the billion dollars you made last month shorting financials?
Weak: You can't predict what the market will do using publicly available information such as news reports and charts. It is possible to earn outsized returns from private, insider information. Widely accepted.
So anyone using this year's events to "disprove" EMH, be aware that you are only disproving an extreme version that isn't what most people mean by the phrase.
Socialist societies do not suffer from bank failures, economic bubbles that collapse, greedy capitalists or stock market crashes because they have progressed beyond banks, bubbles, capitalism and stock market. They feel the effects of these thing tangentially when their capitalist neighbors suffer another catastrophe.
No one curses rising gas prices if he has no car; no one curses rising food prices if none is for sale; no one curses health care costs after the last doctor left for America. We socialists share the wealth. We are all equal. Viva Cuba!
Viva Castro! Viva Obama!
Of course not.
That's not to say they have no value. To paraphrase Eisenhower:
The theories are useless, but the theorizing is indispensable.
Maybe if people didn't keep yelling "this time it's different", more theories would survive first contact with the enemy.
Academic theories meet human nature and explode.
Many may be sick of hearing his name, but I think Taleb's view that randomness is at the heart of financial activity (along with many other facets of our lives) has some staying power in addressing the appearance of rare financial crises.
A theory predicting when something will/will not happen, accurately and consistently is doomed to failure. A theory predicting that something will happen, without specifying when, can be correct but is almost completely useless.
It's a good bet that any scheme involving infinitely rising asset prices, derived by extrapolating rising asset prices, is a bubble and will come crashing down. Predicting when it will come crashing down is a bit harder. It's possible with various sources of insider information of course, but that's less of a theory and more of an early warning that the hull has been breached and the ship is about to go down.
Von Clausewitz and I share the same birthday, June 1st.
Eerily, so does Le Pétomane, the greatest fartiste in history!
We can reasonably require of any theory of financial crises that it allow us to identify when a bubble is forming. And when one is not forming. What we cannot do is expect it to predict when the necessary random event will cause the bubble to burst. At most, it may identify what kind of event will burst the bubble.
Someday, someone may manage to come up with a theory which not only allows forming bubbles to be identified, but also shows how to deflate them early. Without producing serious political repercussions as a result. That gal gets the Nobel Prize by acclimation!
Parts of theories will be right. Those parts that are right will be - eventually - incorporated into policy which can eliminate those failure modes. Take, for example, the growth of Monetarism out of the "ashes" of Keynsianism.
But this then exposes other failure modes that have never been seen before. People will keep kiting up financial instruments until a crash occurs. If infection does not get you, cancer does; cure cancer? Alzheimers. But Entropy will have its way with you...
In this case, it was Bad Modelling Assumptions and we don't need a theory for *that*.
No theory will ever survive, but not I think for the usual reasons generally stated.
Different schools have different theories about what causes recessions. The standard keynesian story is that inventories build up, of companies make a lot of stuff that noone wants to buy. The Austrian one is (I think) that specualtors finance long term with short term liabilites, which blow up from time to time. The neo classical type, who believe in 'rational' investors kind of think that recessions are kind of impossible, but I think that is where one can find the answer.
What 'rational' in this case means, is just intelligent. If people are always 'rational' ,they are thus always 'intelligent', they don't screw up. This doesn't describe the humans that live on the planet Earth as far as I can see. Recessions happen when too many people screw up at the same time. Sometimes it's the guy at the Fed, sometimes it's Congressmen, sometimes it's Wall Streeters, sometimes it's commercial bankers, or as in the current case sometimes it's all at the same time.
Per a theory of financial crises, such a theory would be a theory about how people go about screwing up, that they screw up in a predictable and recurring fashion. I think such a theorist is selling human creativity short, humans are creative problem creators, and I don't think it's quite possible to predict exactly what they'll do to screw things up. Therefore the answer is no.
Just to add one more ingrediant to the cocktail that's being drank right now... how about the traction the EMH has gotten in the past few years. Cannot let the economics professors off the hook. The EMH can only work if noone believes in it.
If followed, the right theory will never come in contact with the enemy, because it will tell policy makers how to avoid such contact. Milton Friedman's theory on monetary policy took hold in the 80's and have been the basis of world monetary policy ever since. No one is discarding Milton Friedman's monetary policy theories because of this crisis. In fact, all policy makers are building their bailout policies in accordance with that theory because of its strength. So, if his theories are so sound, why did the theory come in contact with the enemy? Because his theories on government fiscal policy have been ignored for 70+ years, and to be fair his theories on government fiscal policies while strong are more ideological rather than based upon a theoretical framework. Economists need to provide a strong theoretical framework which shows that Milton Friedman's views on government fiscal policy are theoretically just as strong as his theories on monetary policy.
EMH? Efficient Market Hypothesis?
There are different levels of Efficient Market Hypothesis
Strong: The market is always right, there are no bubbles, nothing is ever over bought or oversold. Easy to disprove, very hard to find anyone who believed it in the first place.
Medium: The market cannot be predicted. Nobody will make money by predicting what the market is going to do. To put it another way, you are not smarter than 5000 professional money managers. If you are, where is your billion dollars?
Medium short term: You can predict that cocacola will earn lots of money over the next 20 years, but you can't predict what the price will be next week. If you can, where is the billion dollars you made last month shorting financials?
Weak: You can't predict what the market will do using publicly available information such as news reports and charts. It is possible to earn outsized returns from private, insider information. Widely accepted.
So anyone using this year's events to "disprove" EMH, be aware that you are only disproving an extreme version that isn't what most people mean by the phrase.
Socialist societies do not suffer from bank failures, economic bubbles that collapse, greedy capitalists or stock market crashes because they have progressed beyond banks, bubbles, capitalism and stock market. They feel the effects of these thing tangentially when their capitalist neighbors suffer another catastrophe.
No one curses rising gas prices if he has no car; no one curses rising food prices if none is for sale; no one curses health care costs after the last doctor left for America. We socialists share the wealth. We are all equal. Viva Cuba!
Viva Castro! Viva Obama!