Sunday, March 1, 2009

Shame the financial economists?

Thanks to Hans Olav Melberg for this tip:

Nassim “Black Swan” Taleb and Pablo Triana (a derivatives consultant) wrote an opinion piece in the Financial Times last year where they asserted that the risk management techniques taught by financial economists were to blame for hiding the true risks in the economy and allowing the economy to swell up to the bursting point. The opinion piece makes two interesting claims:

1. Many members of the economics profession saw the flaws in these methods but allowed the financial economists to keep their prestige (e.g. “Nobel” prize in economics) and spread their financial models to students. Those economists are bystanders who failed in their moral duty to stop this before it created our current woes

2. We will not convince financial economists of their errors through logical persuasion and data – we need to use shame/social pressure

So how can we displace a fraud? Not by preaching nor by rational argument (believe us, we tried). Not by evidence. Risk methods that failed dramatically in the real world continue to be taught to students in business schools, where professors never lose tenure for the misapplications of those methods. As we are writing these lines, close to 100,000 MBAs are still learning portfolio theory – it is uniformly on the programme for next semester. An airline company would ground the aircraft and investigate after the crash – universities would put more aircraft in the skies, crash after crash. The fraud can be displaced only by shaming people, by boycotting the orthodox financial economics establishment and the institutions that allowed this to happen.

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