Quick post about a NYT story on the inherent difficulties in economics – with obvious applications in investments. Also pretty useful as a teaser for our Castles of Sand introductory text in the Q3 2010 report.
“It’s not just that there is so little clear signal amid so much noise. It’s that many economists have a unique idea of what signal to listen to and what priority it deserves.”
“ ‘Pride is not in the model. Revenge is not in the model. Fear is not in the model. Even simple things like the disenchantment of people who are fired from their jobs — the model doesn’t account for how devastating that experience can be.’ ”
“ ‘But there’s a good reason that human irrationality isn’t part of the standard economic models, and this gets to the dilemma of economics. If you have a simple problem, you can offer a simple solution. But the economy is a hugely complex problem. So we either simplify the problem and offer a solution, or embrace the complexity and do nothing’.”