Wednesday, December 10, 2008

On the 'New Capitalism'

Following on from my reference to Robert Peston's recent PDF (here) Roy Simpson wrote to me as follows.

"Yes, I read that article yesterday. Having read Mandelbrot last year and having just finished the much commented on Taleb's Black Swan book it seems increasingly the case that the Financial Industry has gotten their mathematical model basics wrong.

Specifically the use of the "normal = gaussian distribution" where it is not (always) appropriate. Both Mandelbrot and Taleb see themselves as ignored outsiders in that industry promoting a new mathematical approach to unthinking insider "experts". Mandelbrot is more the "Darwin" whereas Taleb is more the "Huxley" taking on everyone he can find (hence getting interviewed a lot now). Quite a familiar story, in a sense.

Also biilionaire trader Soros describes this as the end of not just the recent housing bubble but of an economic-theory driven "super-bubble" that began in 1980. Surely these things have some sort of link to events that have happened in the wider industry, but what is the link I wonder?"


My reply.

"I saw Taleb on Newsnight and he appeared to be a bumptious self-promoter with barely an original idea in his head. He went into my 'dud' file straightaway.

"There seem to be lots of physicists at the moment busily trying to 'straighten out' the economists (e.g. here but it's all over). Peston has argued that the purely local nature of specific bank and financial institutional models means they are blind to systemic correlations across the entire industry. They therefore assume independence wrt unlikely events, which is not of course the case when a global disaster strikes. Where, for example, was the primal, unsustainable level of global debt factored into these models?

"My own belief, for what little it's worth, is that the financial sector is a human activity in pursuit of local optimisations (profits), driven through a series of feedback loops with delay, and that this non-linearity always leads to overshoots. So I automatically filter out all the stupidity which says that we'll set things up in future so that such crises will never occur again. "