Old friend Carl has used this Pascal quote recently to remind me that mediocrity is the rule, and any attempts to transcend it are often resisted with a vengeance – an annoyingly regular truth much in evidence in today’s political scene. It’s from Blaise Pascal, an interesting character from the 17th Century – a mathematician who became a religious philosopher who died before he was 40. I remember Pascal’s Triangle from algebra – a device for calculating the coefficients of expanded binomials [funny what things stick in the mind]:
Sometimes I wish that things were as precise as Pascal’s Triangle instead of as muddy as the world of his quotes [but if that were the case, I’m sure I’d wish for more mud]. But I was thinking about Carl’s Pascal quote tonight for a reason.
I always liked mathematics. It was my talent and my college major. I went to medical school with an eye towards doing research, the kind that you do with mathematic precision. But I ended up in the most subjective of anything remotely medical – psychoanalysis. As imprecise and peculiar as it is, it felt like research to me of the best kind because I never had any idea what I’d find or where the journey was heading. I got to thinking about that dichotomy – the precision of mathematics and the endless complexity of human mental life – when I was reading about the failure of economists to predict the dreadful state of our economy [the economic economist’s crisis…]. Their own self critique was pretty insightful by my first reading [The Financial Crisis and the Systemic Failure of Academic Economics]. But, in retrospect, I think it was off the mark. Economics is an applied science. They treated it like it was Algebra.
They said that the economic models were designed to study stable systems and were constructed with assumptions weighted towards stability, leaving out the less precise, chaotic realities of financial institutions and investors. I guess the problems are more like Pascal’s Quotes than his Algebra. I was thinking that’s what I liked about my final profession. No matter how hard I tried to nail things down and no matter how much literature I read, the endless purturbations of my patients’ mental currents always had a ripple or two that made my last model too simple, in need of revision. The story was in the person, not in the models.
What the economists failed to see were the entrepreneurs and speculators searching for loopholes, places between the cracks, inefficiencies in the system where profits could be extracted. And over the last thirty years, those "holes" became wider and more numerous. Hedge funds bought long and short. The derivative markets became a casino. Speculators manipulated the futures markets, creating bubbles to exploit. Unsecured insurance in the form of credit default swaps were the source for outrageous bonuses while piling up future debt for unsuspecting taxpayers. There was even room for long term Ponzi schemes. What model would an economist use to mathematically recreate that kind of chaos? How does one put corruption into a spreadsheet? What parameters would represent Hedge Funds when they weren’t even required to register, much less submit to regulation? In a system that couldn’t even detect that a fifty billion dollar semi Hedge Fund with only one accountant [in a shopping center store front] might be on the take, what good is a mathematical model?
I think that the economists let us down, sure enough. But I don’t think it was an inadequacy in their ability to make mathematic models. I think they let us down by failing to alert us that we had a system that could not be modeled, couldn’t even be defined. They could have told us that the findings of rising house prices indicated corruption from the agents, speculators, loan originators, mortgage brokers, CDO Traders, credit default swap sellers, etc. They let us down by staying in their offices looking at graphs, indices, and models, and not investigating the markets in person to actually see how they were working. They didn’t get their hands dirty and run down the truth about the systems they were pontificating about. Real scientists live in the interface between the world as it looks on paper and the world as it actually exists. It looks to me like the economists never really entered the reality of the financial world they were being paid to study…
The hottest new field in economics and business schools seems to be the study of the psychology of decision making. I didn’t keep it, but there was a recent news story about using functional brain scans to locate areas of mental activity as people contemplated financial decisions. As I remember, it had little to do with rational evaluation.