Mathematics, psychology, decisions


According to naïve inductivism we might suppose that if the evidence has always fitted the models, then actions based on the supposition that they will continue to do so will be justified. (Hence, ‘it is rational to act as if the model is true’). But for something as complex as an economy the models are necessarily incomplete, so that one can only say that the evidence fitted the models within the context as it was at the time…

djmarsay

I attended a conference on the mathematics of finance last week. It seems that things would have gone better in 2007/8 if only policy makers had employed some mathematicians to critique the then dominant dogmas. But I am not so sure. I think one would need to understand why people went along with the dogmas. Psychology, such as behavioural economics, doesn’t seem to help much, since although it challenges some aspects of the dogmas it fails to challenge (and perhaps even promotes) other aspects, so that it is not at all clear how it could have helped.

Here I speculate on an answer.

Finance and economics are either empirical subjects or they are quasi-religious, based on dogmas. The problems seem to arise when they are the latter but we mistake them for the former. If they are empirical then they have models whose justification is based on evidence.

Naïve inductivism boils…

View original post 354 more words

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s