Archives for posts with tag: LTCM

One way to interpret Maslow’s pyramid of needs is to consider that an individual might become a full fledged human only after having climbed to the ‘fifth floor’.

The key word here being “might”!

Because nothing mandates that all those who have overcome the material constraints of this world and have successfully integrated themselves in the social milieu will ever become a ‘better version of themselves’.

Need examples? Have you ever heard about people like Bernie Madoff, Martin Shkreli or Myron Scholes?

‘But the last guy, Myron Scholes, was recognized by the Nobel committee as a world class economist!’
Exactly! What more could a person want? Money, fame, worldwide recognition… he was on the fast track to becoming whoever he wanted…
Yet he had chosen to associate himself with one of the deepest financial black-hole ever… Knowingly, unknowingly… doesn’t matter!

‘But what does it mean to become a full fledged human?’

To be free. To consider them-self a free person and to be recognized as such by their peers.

‘Scholes wasn’t a free person?!? Shkreli?!? Madoff?!?’

Nope. Neither was free from greed!
Greed for money, power, public recognition… or any combination thereof.

‘But “greed is good”!!! Isn’t this the current mantra? Aren’t we all driven by this sentiment?!?’

First of all, greed is not good. Read Adam Smith’s Theory of Moral Sentiment.
But yes, we are bombarded from all sides with this notion. That ‘greed is good. That greed is the engine of capitalism, which capitalism has brought us here. Where it is good.’

Yes, here it is indeed good. Only for fewer and fewer of us. It used to be better but since ‘greed has become good’ every ‘bump’ we encounter along the ‘free market’ road has proven to be quite a challenge. An insurmountable challenge for more and more of us.
An unsustainable arrangement. For us, as a community.
And yes, capitalism is the best economic paradigm to date. Only, as all paradigms, it has to be put in practice. By us, the people. In the right way. In the free market way.
Only we are no longer free! Those who cannot escape their sentiment may not consider themselves free. And too many of us have been enslaved by their greed!

‘But greed is written in our DNA!’

Indeed! So is the urge to have sex!
Only we’ve managed to teach ourselves, community wise, that while sex is good, rape is bad!
Not so long ago, rape was more or less condoned. ‘She must have enticed him’. ‘What was she doing there at that hour?’ And so on…
Nowadays, rape is shunned. By most of us.

Only we still live surrounded by rape culture. Seeped in greed.

Will we ever learn?
Will we, as a community, ‘actualize’ ourselves?

Abraham Maslow, the initiator of ‘humanistic psychology’, has been described as being “concerned with questions such as, “Why don’t more people self-actualize if their basic needs are met?” and basically why don’t people try to reach their full potential.”

“To over simplify the matter somewhat it is as if Freud supplied to us the sick half of psychology and we must now fill it out with the healthy half. Perhaps this health psychology will give us more possibility for controlling and improving our lives and for making ourselves better people. Perhaps this will be more fruitful than asking “how to get unsick”. (A. Maslow, Toward a Psychology of Being,)

In a sense Maslow follows in the footsteps of J.J. Rousseau.

“Although, in this state [civil society], he deprives himself of some advantages which he got from nature, he gains in return others so great, his faculties are so stimulated and developed, his ideas so extended, his feelings so ennobled, and his whole soul so uplifted, that, did not the abuses of this new condition often degrade him below that which he left, he would be bound to bless continually the happy moment which took him from it for ever, and, instead of a stupid and unimaginative animal, made him an intelligent being and a man” (J.J. Rousseau, The Social Contract)

In more than one sense.

Both consider that society presents its members with almost endless opportunities for self em-betterment, both wonder how come so few make good use of those opportunities and both have been accused of things they have never done.

Rousseau has been falsely accused of being the father of the ‘Noble Sauvage’ – and the quote above proves his complete innocence, ‘stupid and unimaginative animals’ can be mistaken for ‘noble savages’ only by those ‘abused’ by their ‘new condition’ – while Maslow’s detractors – who have failed to scientifically validate all aspects of ‘the hierarchy of needs’ – are questioning the scientific nature of Maslow’s ideas instead of reconsidering their own positions. (The truth being that Maslow had stated upfront that “I yield to the temptation to present it (his notion of a ‘Psychology of Health’, which includes the concept of ‘self-actualization’) publicly even before it is checked and confirmed, and before it can be called reliable scientific knowledge“)

Unfortunately it is rather obvious that while Maslow has successfully detailed what it takes for an individual to ‘ripen’ into the situation of being able to ‘reconsider its own self’, he failed to reach as far as Rousseau was able to. While the latter deplored the fact that ‘the abuses of his new condition often degrade him below that which he left’ the first blindly entertained the notion that self-actualization is necessarily a positive process.

I’ll use only two examples to illustrate my theory, even if by doing so I’m presenting myself as a target for the ‘science-nazi’.
First take a glance at those who founded/were involved in running LTCM. All of them had very respectable careers behind them at that moment. Why did they feel the need to get involved in such a risky business? For those of you unfamiliar with the financial world LTCM was a hedge fund which had to be bailed out in 1998 after losing $4.6 billion, a huge amount of money for those times.
Then tell me what drove Bernard Madoff, an already very successful ‘operator’ in the financial market  to transform the wealth management branch of his company into a huge Ponzi scheme that eventually lost some $18 billion of actual money ($65  billion if the fabricated gains are added to the total)? Not to mention the fact that he involved his family into the daily operation of his company, leading to his brother being sentenced to 10 years in prison and one of his sons committing suicide… – the other one died of lymphoma a few years after Madoff had been incarcerated.

Could it be that this ‘self-actualization’ business depends on two things, the character of the individual involved and the kind of interaction that exists between him and the community of which he is a member? Meaning that if the ties are weak the character of the individual becomes the dominant factor?

And since nobody’s perfect…

“It is not power that corrupts but fear. Fear of losing power corrupts those who wield it and fear of the scourge of power corrupts those who are subject to it.” (Aung San Suu Kyi, Freedom from Fear)

But also

All governments suffer a recurring problem: Power attracts pathological personalities. It is not that power corrupts but that it is magnetic to the corruptible.” Frank Herbert, Chapterhouse: Dune

I’ll end up saying that it’s not the governments that have a ‘recurring problem’ but the peoples themselves. By definition governments come and go, it’s the peoples that stay behind and must suffer the consequences of ‘self-actualizations’ went wrong.

The current spate of dissent on this subject has been spurred by this guy, Angus Deaton, being presented with The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel

“A Nobel prize in economics implies that the human world operates much like the physical world: that it can be described and understood in neutral terms, and that it lends itself to modelling, like chemical reactions or the movement of the stars. It creates the impression that economists are not in the business of constructing inherently imperfect theories, but of discovering timeless truths.”

I’m afraid that the author had been so disgusted by the obvious mistakes that have been committed by so many of the supposedly reputable economists of this world that he has become amenable to throwing out the baby along with the bath water.

First of all we must remember that “Science is wrong. By definition.” All theories are imperfect and there is no such thing as ‘timeless truths’.
Ever since Karl Popper introduced the idea of ‘falsifiability’ as the litmus test for determining if any piece of information has any scientific value and Berger & Luckmann noticed “The Social Construction of Reality” it had become apparent both that science is being updated constantly – hence always ‘wrong’, or at least incomplete – and that people are ‘doing science’ on purpose – hence any discussion about reality being ‘described and understood in neutral terms’ is unrealistic, to say the least.

Coming back to Popper, Hermann Bondi had declared that ‘There is no more to science than its method, and there is no more to its method than Popper has said.’
True enough but as any ‘scientific declaration’ this is highly ‘updatable’.

In fact Science is, above all, a human enterprise. It’s a human that picks up – or devises – which method to use in a certain situation when he wants to find out something about a certain subject. Furthermore that method is applied by human individuals, not by robots. The same as those who had chosen it or by others, doesn’t make much difference. And, at the end of the cycle, some other people will evaluate – and sometimes try to replicate – the results.

So the mere fact that a certain set of results could not have been replicated by a certain team of evaluators doesn’t mean that much, by itself. This has been silently acknowledged by Andrew C. Chang and Philip Li in a paper published by the Federal Reserve in 2015: “Is Economics Research Replicable? Sixty Published Papers from Thirteen Journals Say ”Usually Not””. The couple admitted they needed some help from the original authors to replicate the results in a few instances and in some-others they didn’t have access to the same computer software as the first publishers.

But the most interesting fact is that in no instance the authors have been able to positively determine that the results published in any of the analyzed papers are inconsistent with the data presented by the original authors and/with the method invoked. In all instances when they failed to replicate the original results that happened because the original authors didn’t present at all the initial sets of data, they were incomplete or the method/sofware used to  process that data was incomplete, altogether missing or proprietary. And all this despite in some cases the papers being published by journals specifically requesting that all data/methods/software being made available at the moment of publication.

In this situation I find the conclusion reached as being both correct and highly objectionable. And above all lacking any scientific value.
“Because we successfully replicate less than half of the papers in our sample even with assistance from the authors, we conclude that economics research is usually not replicable.”

Yes, it seems that too many papers published by presumably reputable journals are not replicable. But that is due exclusively to the journals themselves not observing their own rules or by some of the authors acting less than ‘over the table’. This phenomenon has nothing to do with ‘economics’ being less of a science than, say, physics and everything to do with humans being… well… human!

Let me go back to where I started, to Joris Luyendijk claim that “Don’t let the Nobel prize fool you. Economics is not a science.”
The author ‘illustrates’ his claim by remembering the infamous LTCM – a hedge fund set up by, among others, a couple of economists who had received a … you guessed it… a ‘Nobel prize for economics’ less than a year before the hedge fund went bust. Kind of ironic, isn’t it?
But the problem remains. The fact that LTCM went bust doesn’t prove anything except the fact that its management was completely inadequate.
The point is that trying to assert that ‘economics’ is not a science only because some guys used a couple of economic theories and failed, abysmally, is akin to claiming that physics is not a proper science because no weather bulletin is 100 percent accurate. Or that biology is not a full blown science because medicine has not yet found a cure for cancer. Or to claim that chemistry is bogus simply because Big Pharma is ripping us off.

At the end of their paper Chang and Li offer some very pertinent advice about how things could be vastly improved. Their main idea being that everything must be ‘above the table’ – both the raw data and the method/software used to process it must be made available for whomever wants to replicate the results. In fact this exactly what science, real science, is about. People have to be able to check thoroughly whatever the proponents of a theory are trying to ‘peddle’. This is the only way for a theory to be proved true or false. Or incomplete so further research might be declared necessary.

Similarly, at the end of his article Joris Luyendijk points his finger at the real culprit.
In reality economics, as a space where people try to gather information, is different from, say physics, only because we, the people, approach them with different attitudes.
Time has taught us, repeatedly, that every-time we’ve tried to deny the obvious we ended up with a bloody nose. The problem is that not all of us are, yet, able to recognize the obvious.
No one in his right mind will pretend, nowadays, that the Earth is flat. Meanwhile some people still pretend that vaccines may induce autism. They don’t. But some of the ‘anti-Vaxxers’ continue to pretend this even after a study partly funded by themselves demonstrated that there is no link between the two.

As suggested by Luyendijk and demonstrated by these examples the real culprit for what is going on, not only in the economic field, is our arrogance.
Arrogance that has led to the survival of what is known as ‘tehnocratic thinking’ despite more and more people learning of the role ideology plays in our decision making.

After all what can be more arrogant than pretending that you have ‘scientific reasons’ for what you do, despite the obvious fact that every one of us acts according to his own ideology?

I’m not going to pretend now that there are good and bad ideologies. I obviously think they can be classified but I cannot pretend that my classification is the correct one.
But I can pretend, and you should too, along with Joris Luyendijk, Andrew C Chang and Philip Li, that each of us should honestly state its point of view along with his opinion when ever discussing something.

After all each of us having an ideology is a reality while pretending that any of us can act as if it doesn’t is a rather pathetic lie.

To conclude I’ll have to keep the promise I’ve made at the beginning of all this and ‘update’ Bondi’s statement about Popper:
‘There is no more to science than its method and there is no more to its method than Popper has said’ but we should always bear in mind that science is exclusively ‘performed’ by human individuals.

 

%d bloggers like this: