Wall Street 3 - The Rise of the Machines

Discussed algorithmic trading recently with an economics professor and mentioned the claim that this can create instabilities. For instance, if too many use similar programs, these can create feedback loops such that sales trigger new sales that trigger new sales etc. Or that the mix of currently existing strategies interact in such a way that they create a bubble. The response was that this is unlikely to happen - as traders will take into account the nature of and intereactions between the different strategies that are out there. As Robert Anton Wilson said, you can always see the invisible hand as long as you look hard enough and long enough (or something along those lines).

Amplify’d from www.wired.com

Over the past decade, algorithmic trading has overtaken the industry. From the single desk of a startup hedge fund to the gilded halls of Goldman Sachs, computer code is now responsible for most of the activity on Wall Street. (By some estimates, computer-aided high-frequency trading now accounts for about 70 percent of total trade volume.) Increasingly, the market’s ups and downs are determined not by traders competing to see who has the best information or sharpest business mind but by algorithms feverishly scanning for faint signals of potential profit.

at its worst, it is an inscrutable and uncontrollable feedback loop. Individually, these algorithms may be easy to control but when they interact they can create unexpected behaviors—a conversation that can overwhelm the system it was built to navigate. On May 6, 2010, the Dow Jones Industrial Average inexplicably experienced a series of drops that came to be known as the flash crash, at one point shedding some 573 points in five minutes. Less than five months later, Progress Energy, a North Carolina utility, watched helplessly as its share price fell 90 percent. Also in late September, Apple shares dropped nearly 4 percent in just 30 seconds, before recovering a few minutes later.

And they started applying those methods to every aspect of the financial industry. Some built algorithms to perform the familiar function of discovering, buying, and selling individual stocks (a practice known as proprietary, or “prop,” trading). Others devised algorithms to help brokers execute large trades—massive buy or sell orders that take a while to go through and that become vulnerable to price manipulation if other traders sniff them out before they’re completed. These algorithms break up and optimize those orders to conceal them from the rest of the market. (This, confusingly enough, is known as algorithmic trading.) Still others are used to crack those codes, to discover the massive orders that other quants are trying to conceal. (This is called predatory trading.)

The result is a universe of competing lines of code, each of them trying to outsmart and one-up the other. “We often discuss it in terms of The Hunt for Red October, like submarine warfare,” says Dan Mathisson, head of Advanced Execution Services at Credit Suisse. “There are predatory traders out there that are constantly probing in the dark, trying to detect the presence of a big submarine coming through. And the job of the algorithmic trader is to make that submarine as stealth as possible.”

In late September, the Commodity Futures Trading Commission and the Securities and Exchange Commission released a 104-page report on the May 6 flash crash. The culprit, the report determined, was a “large fundamental trader” that had used an algorithm to hedge its stock market position. The trade was executed in just 20 minutes—an extremely aggressive time frame, which triggered a market plunge as other algorithms reacted, first to the sale and then to one another’s behavior. The chaos produced seemingly nonsensical trades—shares of Accenture were sold for a penny, for instance, while shares of Apple were purchased for $100,000 each. (Both trades were subsequently canceled.) The activity briefly paralyzed the entire financial system. Read more at www.wired.com

 

See this Amp at http://amplify.com/u/jqzp

The rational agent has been found

He was in a comic book.

Also, he was a mean, evil criminal...

From The Prediction Machine: "

Source: 'Fantastic Four Giant' #5. Invented by Stan Lee and Jack Kirby.

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Truth and beauty in economics

Hans directed me to the following quote from Keynes recently used by Krugman in his blog:

The completeness of the Ricardian victory is something of a curiosity and a mystery.... That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

This inspired me to try a more old-fashioned style in expressing my own views on the matter.

Theories and beliefs are supported by how right they feel to us and how well they survive confrontation with the facts. The first criteria speaks to human cognitive preferences - the desire for parsimonious, consistent and elegant structures that we can "see" how work and that we can admire in their precise beauty. The second criteria speaks to empirical truth, the grudgingly admitted recognition that messy facts and the jumble of a complex world are the stuff that we are, in the final analysis, trying to understand. And when practical difficulties, methodological weaknesses or an implicit cultural agreement free us from the need of confrontations with empirical data, we become even more strongly wedded to pursuing, protecting and promoting the "truths" we believe ourselves so strongly to see.  

 

I need to start smoking a pipe and use a mechanical typewriter if I’m going to keep on like this.

Geographical distribution of scientific claims

Richard Dawkins pokes fun at the geographical distribution of religious faiths, and claims that “we immediately see […] how totally ridiculous that is” when we imagine a world where scientific beliefs were distributed in the same way.

LOL.

Yeah, cause that would be totally silly. Like if, say, macroeconomists along US coastlines tended to claim totally opposite things from those around the large inland freshwater lakes regarding why depressions occur, whether fiscal policy works, whether markets are efficient, etc. If that’s how things were, you might even suspect that macro-economics wasn’t a science at all, which it obviously is: I mean, come on! They’ve got equations, econometrics and jargon that could confuse an audience more thoroughly than a medieval Pope speaking in Latin and tongues. And the holy trinity has nothing on the representative agent – I mean, forget being three and one at the same time, this dude is all of us!!!

Also fun to note: Prankster Paul Krugman takes Dawkin’s joke and runs with it, cooking up some fanciful story about so-called Freshwater and Saltwater economics in the US here (especially section IV and onward) and here. Nice imagining of an alternative bizarro world there that makes it obvious to all just how far from a religion economics in real life actually is.

Efficient Market Hypothesis and criticism

IN a recent blogpost the odd and quirky Robin Hanson discusses How To Dis EMH (Efficient Market Hypothesis) and (more importantly) - how not to. He shows some quotes of the debates going on and argues that you cannot judge EMH unless you can at the time do better than it and prove that you can do this consistenly over time.

So the clearest way for EMH skeptics to show they are right is to collect a track record showing that they can predict, ahead of time, when prices are too high, vs. too low. There’s little point in picking out some year old event, and saying, “see that price drop was too big.” Monday morning quarterbacking is way too easy.

...

But all this continual harping year after year on how EMH is obviously wrong, based on selective stories of past prices you say were obviously wrong, sounds awful suspicious when you don’t bother to publicly flag price errors at the time, much less to collect and publicize a track record of such error flags. (E.g., care to declare which prices are wrong today?) What’s up with that?

It's an interesting point that I agree with to a point, but there's something odd about it as well. I think it may have something to do with what we mean by "criticism of EMH". Hanson's point is valid if a critic says that the EMH is often obviously wrong and can easily be improved. But what if a critic says that the quality of forward looking predictions (including his/her own) is generally poor, and that this translates into an extreme volatility in stock markets and markets in futures and derivatives? If this is so, and if there are significant and real costs to sharply and vigorously yanking the economy towards whatever-our-best-guesstimate-of-the-future-is-right-now, then we might not want our economy to be as dependent on the estimates of the future. We may be able to choose or influence at a social or policy level how "forward looking" our economy is in its adjustments - and we may not want the ADHD economy that wants to pull up all roots and set sails towards whatever the future seems to hold at any given instant.

From Economics to Ideology to Real World Disaster?

Two interesting articles I recently read tied nicely together as a story about how the search for intellectual sophistication and grand theory in economics generated a doctrinaire belief in the free markets marvels and ability to police itself, which became an intellectual alibi and ideological fuel for a "hands-off-the-economy" Conservative movement, that in turn removed all road-blocks to a Financial Crisis and completely bungled the reconstruction of Iraq.

Phew... that was a long sentence...

Anyway - this piece by Kenneth Davidson in the American Interest argues that George Stigler and Milton Friedman turned the Chicago School of Economics into the hotbed of laissez faire economics that it is still regarded as today. And how this in turn helped along a new policy of deregulation that created the recent Financial Crisis.

Once it abandoned its political concerns with economic power, Chicago theory, with its axioms of profit maximization, perfect information and self-correcting markets, had no advice to limit the downside risks of economic and financial disaster. The fruitful blending of social and economic concerns pioneered by Simons may not be suitable to a modern economy, but his concern about the dangers of centralizing economic power remains an issue that is ignored by the Chicago School. Doctrine supplanted healthy intellectual doubt, theoretical purity trumped common sense and historical memory, acolytes took over from masters, and a different kind of irrational exuberance was the result. We’re all now paying the price.

The other piece, by Naomi Klein, in the Atlantic from 2004, describes the reasoning behind the Iraq reconstruction effort - basically, the attempt to set up a totally free and rigorous free market paradise that would have every capitalist in the Milky Way clamoring to invest and generate jobs, wealth and prosperity for all. While clearly biased against this ideology, there are numerous interesting quotes and witty observations - though it seems weird to both argue that their attempt was foiled because it was illegal against international law and to argue that the chaos of Iraq that followed should be proof that a full and perfect implementation of free market laws and regulations does not work.

And - as always - both authors can be attacked by any economist worth his salt. Because academic economics, of course, has nuances and spends much of its time discussing and analyzing flaws and caveats to the simplified picture that these authors attack. Its just that no conclusion ever lives on except as it does in broad stroke form. Friedman's essay on positive economics becomes "unrealistic assumptions are fine and lead to true welfare conclusions because it is all as if theory". A "perfect competition" reference model and "rationality assumption" with selfish preferences becomes "the broad truth" and what policy makers with bachelors in Economics and even the intuitions of many sophisticated researchers reach for.

Or something like that - what's the point? - if you recall this in the future it may all be reduced to "he blames economics for Iraq and everything that goes wrong" anyway... ;-)

Distorting the truth to make the case that economists distort the truth?

Hans made me aware of this: In a recent blogpost entitled "What Should Economists Study?" Brad DeLong writes the following:

As one of the students interviewed for the original The Making of an Economist, let me say that there was a distressingly wide gap between what we told Colander and Klamer and what they heard: we were not nearly as stupid and as narrow as they wanted us to be.

Bit of a let-down, since several of their claims seemed to ring true to me, but worth noting. Seems a bit silly to ignore empirical data when it contradicts your hypothesis that economists too frequently ignore empirical data.

BTW - don't recall this book as arguing that economist students were stupid or narrow. It's argument was more that the education they were offered seemed - to them - to be narrow and stupid. As far as I recall from skimming it several years ago.

The evidence I see vs. the evidence I don't want to see

Tyler Cowen writes about a restaurant where you roll 3 dice after your meal and get the pizza for free if you roll 4-3-1. He writes:

I take this as evidence against the view that people systematically miscalculate expected utility in repeated, real market settings. If they did, you would expect to see commercial lures like this much more often. Maybe in mortgage markets, or credit card markets, people are overoptimistic about the bad (too many floating rate mortgages or too many people accepting the risk of high default fees), but I don't think in pizza markets they are overoptimistic about the good. A restaurant which makes this kind of offer, of course, has to charge systematically higher prices, the greater the customer's chance of winning the lottery,

I wholeheartedly agree. If people systematically miscalculated expected utility in repeated, real market settings you would see a lot more stuff like, for instance, rip-off "extra warranties" when you purchase electronic equipment, or maybe even "lotteries," slot machines, roulette games etc. with negative expected payoff that people participated in regularly, etc. Good thing that's only the stuff of science fiction.

Extreme belief in market similar to extreme beliefs in the State?

It’s a bit childish, but it’s also fun to see a ridicule or teasing wrapped up in an academic argument. The short and blunt version: “Ha ha! Modern macro is doing the same thing as the planned economy guys they (rightly) think are stupid. That means the modern macro guys are stupid as well!”

The argument is an interesting and (I think) insightful analogy that bunches the free-market macroeconomists in with old-style planned-economy advocates that they are politically opposed to :-)

In the old debates about planned vs. market based economies, the “libertarian” economist Friedrich Hayek (who believed on theoretical grounds any intervention in the market would set in motion a slippery slope to totalitarianism) argued the importance of information: Prices, emerging in free markets, were the only way of gathering the often tacit knowledge of market participants into a form that communicated the relative values of various uses of a resource. A lack of market-based prices meant ignorance regarding the value of resources, and misallocation of capital and manpower etc.

Keeping this in mind, it is fun to see the argument that modern representative agent macroeconomics make the same mistake as the advocates of planned economies. Both ignore the importance of dispersed knowledge, over-emphasize the ease with which information/data can be gathered and provide a true and total picture of the world, and base their work on one or more agents having this total understanding of the world (the central planner, or the representative agent).

models vs. economists

I have appreciated that quote by George Box for quite some time, but only when I realized what it implies about the models' creators I saw its true beauty:

"All economists are wrong, but some are useful."

Should I have written `some' with a capital S...?

Scroogenomics: Economist wants to improve the efficiency of Christmas

My grandmother always gave me really big underwear for Christmas. I never wore it. Joel Waldfogel must have had similar experiences since he has written a book on the topic. Not underwear, but Christmas and gift giving in general. Here is the main story.

Serious economist: Giving a gift is not efficient if the recipeint values the gift less than the full cost of the gift. In fact, even if they value it higher than the costs, it may not be efficient since  - assuming you know your own preferences better than other people - you could have spent the money on something that gave you an even higher surplus. So, obviously we should only give each other money. By not doing so Americans waste around $12 billion per year, according to very unbiased estimations.

I do not know whether to laugh or cry. I once read a satirical paper about this is an economics journal. To my surprise I then found that the American Economic Journal has published several articles on the topic - with lots of discussion. And please tell me that I was wrong, please tell me that I just mistunderstood the article, please, please ... but it seems to me that these papers were not satirical.

And now a book has been published by one of the participants: Scroogenomics. The $12 billion is from the book. I have not read it and I pray to God that it is satirical, clever and funny ... but from the description it sounds like he is a serious economist.

Why do I hope this? I would not mind getting more money and less baggy underwear, but the nature and meaning of a gift-exchange is often very different when it involves money. Ariely has some observations on this in his book Predictably Irrational. For instance, bringing wine to a dinner party is OK. Giving money instead is not. Maybe economists would advise us to change the norms, but maybe also economist should recognize that this is not all there is to it. Waldfogel probably knows all this, but goes on anyway. So instead of just saying that it is absurd, I did a real survey and asked people about their willingness to sell gifts and at what price. The result? Many gifts were valued much higher than the cost. Why? Probably because of the sentimental value. So instead of destroying value, Christmas gifts increased value in my calculations.

Wow, I cannot believe I was tricked into doing this. Taking the discussion seriously and playing on their court. Even if the estimation had shown a loss I do not believe we should take it seriously. There are simply too many aspects of gift giving that will be left out in of the quantification to make the conclusion credible. Verdict: Absurd!Afternote: On no, he is serious! See interview.

Will the crisis change economics?

Q. In your view, what can save economics?

A. I am very pessimistic about whether we can actually pull out of this. I think we have created a locomotive. This is the sociology of the economics profession. We have created a monster that is very difficult to stop.

Q. Could real-world empirical facts or a severe economic cataclysm change it?

A. That would certainly change it, but I do not see that around the corner. Perhaps I am too pessimistic, and it is very depressing to stay there. There does not seem to me to be any way out.

(Mark Blaug, The problems with formalism – Interview with Mark Blaug, Challenge, May-June 1998)

Paul Roemer, The Nobel Prize for Elinor Ostrom

In a short essay about the The Nobel Prize for Elinor Ostrom, Paul Roemer writes: 

Bravo to the political scientist who showed that she was a better economist than the economic imperialists who can’t tell the difference between assuming and understanding.

Well said!

From Greg Mankiw's blog

How much should one care about efficiency anyway?

-- some speculations --

Economists are so preoccupied with efficiency that they twist debates away from more important aspects. Often, big social questions do not need to be answered optimally at the margin, they need the right answer.

We economists argue based on what economics is: the subject concerned with the allocation of scarce resources - the subject that teaches efficiency.

But how much should (the rest of) society care about efficiency? How important is it compared to other goals?

ex 1: the equity debate. Economists usually retreat from any debate about unjust distributions of opportunities, wealth, factors and everything else by claiming that due to the "welfare theorems" of some mathematician from long ago by the name of Walras, they do not need to care: The cake should be as big as possible and the sharing can be done afterwards. In that sense, we claim, we do equity a favour - more is for sure better, isn't it?

We solve the social optimization problem and then say a perfect market can achieve it, given the right initial distribution of "x". But nobody says out loud that we can not impact the initial allocations practically. Lump sum transfers do not grow on trees on this planet… And, of course the initial distributions are not "right". So we do not get at the real issue - welfare loss due to wrong initial allocations. The welfare loss we can get at are efficiency losses from redistributive measures - that, we are good at. But that's often not the issue. And by the way, we have no social welfare function in first place, making the initial problem unsolvable (Arrow's impossibility theorem).

That is not to say that the entire subject of economics ignores the relationship betweeen inequities and efficiency - far from. Development economists point out causal effects running both ways. But when economists are not directly concerned with distributive effects, they rest their not so troubled minds on the pillow provided by Walras and go on arguing for efficiency as if there is no other game in town.

ex 2: the climate/technology debate. What might be efficient today is maybe not so good for future developments. If one wants to retain or increase living standards and avoid climate change, one needs new production and consumption technologies.

For sure, we economists do care about growth and have all kinds of growth models; Solow, Romer, Acemoglu, what have you. A caricature of standard models is to "throw money at the R&D sector and out will come growth". And of course there is research about climate change that accounts for technological development.

But what comes out of economics into the public are mainly static efficiency arguments - we should start cleaning up where it is cheapest. Buy into CDM projects in less developed countries. Put up a market and get the prices right and stuff.

The argument for doing the most expensive things today at home since that might mean more rapid technological advances rather than (or in addition to) installing scrubbers in some ancient coal plants in faraway does exist. So does the argument that this symbolizes political will and leadership, engages the public and other countries etc. But those are fuzzy and not as mathematically clear cut as the efficiency argument. Hence they tend to be mentioned as an aside rather than the real issue.

I'm not saying that this or that argument is right or wrong. I'm just saying the latter tends to be put aside because it isn't about what we are most preoccupied with - efficiency. And that means trouble if that's not what it's all about.

That doesn't get easier if economic results are sold as if they would contain more than just efficiency: everything. The implicit or explicit believe that all arguments can be wrapped into some fabric of supply and demand crosses leads to neglecting that there is more to a social issue that can be put into economic models. Again, economics is about allocation of scarce resources. A lot of the world can be looked at that way. But not everything.

Mathematical elegance and empirical relevance – part 2

The previous post raised two questions that need to be kept separate:

1. “How could you convince a fellow die-hard-formalistic-member-of-the-economics-tribe that the profession has gone wrong because it fell in love with mathematical formalism?”
2. Is it true? I.e., is it possible to empirically validate the hypothesis that economists believe stupid empirical claims on the basis of empirically irrelevant mathematical proof/beauty/elegance/norms/whatever?

These are two VERY different questions. The first one bites itself in the tail: If someone relies on irrelevant and false criteria when evaluating claims, then you would have to come up with an argument that succeeds given these false and irrelevant criteria in order to convince him. This sounds logically humorous, like convincing a Christian that God doesn’t exist by making him believe God told him so. Or, in our case, making a nice, formal model that fits the intuition of economists, coheres with all established formal protocol, elegantly extends the standard framework of microeconomic choice, and that results in some absurd and silly proof that rational agents can be rationally misguided by acting and judging in the way the economists see themselves as acting and judging.

Put differently, this is a question of how to manipulate a system (in this case the one determining the beliefs of economists), how to change someone’s beliefs. It is a question of pscyhology.

The second question is – I believe – more important. There is a clear distinction (at least conceptually) between things that influence choice/thought/behavior and things that a person him-/herself believes to influence his/her choice/thought/behavior. What we would like to know is what kind of evidence/arguments/proofs economists emphasize when judging empricial claims from other economists. I am writing as I’m thinking here – always a somewhat risky proposition – but some first thoughts:

• Ask a sample of economists for the 5 strongest arguments that support some academically based empirical conclusion they support (“What are the 5 strongest reasons you know that support your view that technological shocks drive business cycle behavior?”)
• Find some way of categorizing articles and their mix/share of theory/empirics and sum over the references used to support policy claims by economists
• Ask what kinds of implications economists draw from some branch of theory – and then ask what kinds of evidence they believe to be relevant for judging these (an approach Hans Olav Melberg and I have attempted in an article we are currently finishing up)

Mathematical elegance and empirical relevance

Economicst have been accused of confusing mathematical elegance with empirical relevance. I have tended to agree, but then it struck me: What is the basis for the belief? Is it just my accumulated subjective impressions or is it something that could be objectively quantified so as to convince someone who does not agree with me?

In short: How could you convince a fellow die-hard-formalistic-member-of-the-economics-tribe that the profession has gone wrong because it fell in love with mathematical formalism? And is it true?

One could, or course, give examples. Rational addiction theory, real business cycles, rational expectations, the emphasis on microfoundations in New Keynesian economics. In addition to the problem that the die-hard-formalist will not agree with you on the particulars, there are two problems. First, picking examples do not give the whole picture. Second, it seems difficult to prove that the cause of the problem was an excessive love for formal models. It is certainly easy to get the impression that this is the case when reading these paper, but it is just an impression. I really do not know whether the author/editor was too much in love with formal models. All I can and should do with a paper - formal or not - is to point out what I think is right and wrong in it and perhaps I should just quit speculating about why they were wrong as long as it is impossible to test it more objectively?

Note the "perhaps." It may be possible to link the problems in a paper to its love for formalism, or more generally the problems of a profession, but I think we should dig deeper and not just accept that argument because we agree with it based on our own impressions. We need reasons and arguments that can convince the opposition as well!

Everyone and their cousins about macroeconomics

For a brief while there will continue to be a flurry of debate over the intellectual shortcomings of modern economics, centered on the perceived failure of modern macroeconomics in the wake of the financial crisis. A great list of recent contributions to the macroeconomics debate can be found here, on Mark Thoma’s blog “Economist’s View”.

Have fun while it lasts – but don’t think things will change. My prediction is that there may be a surface change in which models the profession believes and so on, but that the underlying issue of “as-if,” consistency with “standard assumptions,” over-mathematization of weird psychological assumptions, overreliance on “stylized facts” and quasi-scientific “rigor” and all the rest will remain more or less as it is. I believe the big problem is that the criteria we use to evaluate claims about the real world are severely lacking – and this is not really improved by exchanging the current models for models that a broader set of people feel comfortable with. If anything, this may impede progress as critical assessment of our subject drops as people become more comfortable with what we say.

Never underestimate the power of the dark side.

Ketchup economists

Paul Krugman has an interesting column in the NYT with the title "How Did Economists Get It So Wrong?" (registration required). There are lots of quotable sentences (silly, absurd, crazy), but the short story is that many economists went wrong because they assumed that people always were rational and the market was efficient. He argues both elegantly and convincingly - and it is well worth a read - but it will not be earth shattering news to those who have followed the debate.

However, buried in the article are also some quotes about economists and their relationship with evidence that deserve to be repeated. First:

But there was something else going on: a general belief that bubbles just don’t happen. What’s striking, when you reread Greenspan’s assurances, is that they weren’t based on evidence — they were based on the a priori assertion that there simply can’t be a bubble in housing.

However, he also writes, more interestingly, that:

To be fair, finance theorists didn’t accept the efficient-market hypothesis merely because it was elegant, convenient and lucrative. They also produced a great deal of statistical evidence, which at first seemed strongly supportive. But this evidence was of an oddly limited form. Finance economists rarely asked the seemingly obvious (though not easily answered) question of whether asset prices made sense given real-world fundamentals like earnings. Instead, they asked only whether asset prices made sense given other asset prices. Larry Summers, now the top economic adviser in the Obama administration, once mocked finance professors with a parable about “ketchup economists” who “have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup,” and conclude from this that the ketchup market is perfectly efficient.

Ketchup economists! The real problem was not that they did not use empirical evidence, but that only a certain type of evidence was admitted. This is different and it raises the question of why only some types of evidence were accepted? Ideology? Ease of quantification?

“Just so” stories in economics and biology

Two popular ways of making waves in Economics is by:

• Revealing a seemingly smart thing to be dumb. Economists love unintended consequences. We love it if you can build up an argument that regulatory agencies will actually benefit the monopolistic industries they are set to serve (e.g., Stigler’s regulatory capture), that politicians are no more interested in the “public good” than business leaders (e.g., Buchanan’s Public Choice), that fiscal policy has no effects (e.g., Lucas and Barro), that minimum wages hurt the poor, etc.
• Revealing a seemingly dumb thing to be smart. Economists also love it if you can prove that individual optimization and markets are smarter and better than non-economists believe. We love it it you can build up an argument that criminals rationally weigh costs and benefits, risks and penalties, that junkies getting hooked are implementing forward looking rational “taste-planning” (both Becker, who has a long long list of such arguments), that QWERTY-keyboards are actually better than any alternatives, that Betamax deserved to lose out to VHS, and so on.

Of course – any of these may be true. Sometimes truth happens to lie where we want it. My point here is more that I have a gut-feeling (that might well be wrong) that tells me these two types of narratives are welcomed more eagerly by economists than mechanisms or hypotheses that don’t fit the mould.

Sometimes I get the feeling that evolutionary biology has some of the same problem. This is related to the “feud” or argument between Dawkins and (now deceased) Stephen Jay Gould. Both fought for evolution and wrote excellent popular non-fiction, but Gould felt that Dawkins had too much of a “full optimization equilibrium” spin on reality around us.

An example of the latter is the paper discussed briefly here. This paper argues that depression – which seems like a dumb thing for an organism to fall into – is actually really really smart.

When one considers all the evidence, depression seems less like a disorder where the brain is operating in a haphazard way, or malfunctioning. Instead, depression seems more like the vertebrate
eye—an intricate, highly organized piece of  machinery that performs a specific function.