Having been a scientist, one of my major pet peeves is the naïve use of science. Let me give you several examples.
The influential biologist and evangelistic atheist Richard Dawkins wrote in the Los Angeles Times several years ago about what he called the scientific “vandalism” involved in hanging Saddam Hussein:
“Hussein’s mind would have been a unique resource for historical, political and psychological research, a resource that is now forever unavailable to scholars. … Psychologists, struggling to understand how an individual human being could be so evil … would give their eye teeth for such a rich research subject. Political scientists … have now lost key evidence forever.”
Elsewhere, Dawkins has also opined on the pernicious effect of fairy tales on children:
“So many of the stories I read allowed the possibility of frogs turning into princes and I’m not sure whether that has a sort of insidious affect on rationality.”
This reminds me a bit of the practical nursery rhymes taught to the alphas in Huxley’s Brave New World:
Orgy-porgy, Ford and fun,
Kiss the girls and make them One.
Boys at one with girls at peace;
Orgy-porgy gives release.
To me, there is something stunningly unimaginative about these remarks. How little you must understand of the complexities of human nature if you think we can learn to avoid the creation of monsters by questioning Saddam, Hitler or Stalin. People aren’t easily investigable objects.
More recently a neuroscientist, David Eagleman, wrote an Op-Ed suggesting that we base the legal system on neuroscience. In it he wrote:
A brain-based approach (to the legal system) can be more cost-effective, humane and successful. If we desire our medical treatments to be biologically informed, shouldn’t we demand the same from our courtrooms?”
Eagleman blithely assumes that crimes are unambiguous objective things, like physical illnesses. Doesn’t he notice that even illnesses themselves are ill-defined, that treatments go in and out fashion? When I was a child tonsillectomies and lobotomies were fashionable. Now stomach banding is in.
I invented the word pragmamorphism for this attitude. Anthropomorphism is the attribution of human characteristics to inanimate objects, that is giving inanimate objects the shape of humans. I use pragmamorphism to refer to attributing to humans the properties of inanimate things, to giving human minds material qualities. The Greek word pragma means a material object, and pragmamorphism is naïve materialism.
The World of Physics
I began my professional life as a physicist, excited by science, filled with a heady mixture of idealism and ambition, aspiring to be another Einstein or Schrödinger who intuited the way the universe works.
Physics is wonderful at this. Newton almost 400 years ago wrote down short one-inch principles and corresponding equations that described nature to an astonishing degree of accuracy. So did Einstein, Schrödinger and Dirac in the last century. Dirac’s equation describes the behavior of electrons in atoms to eleven decimal places. Ernest Rutherford, the New Zealand experimentalist who discovered the hard tiny nucleus at the center of atoms, captured the wonder of this when he said: How can a fellow sit at a table and calculate something that would take me 6 months to measure in the lab?
So, how did Newton write down his laws that explained the motion of planets?
John Maynard Keynes studied Newton’s long-lost cryptic papers and then wrote a speech to be delivered at the tercentenary of Newton’s birth in 1942, from which I quote:
Newton came to be thought of as the first and greatest of the modern age of scientists, a rationalist, one who taught us to think on the lines of cold and untinctured reason. I do not see him in this light. Newton was not the first of the age of reason. He was the last of the magicians, the last of the Babylonians and Sumerians, the last great mind which looked out on the visible and intellectual world with the same eyes as those who began to build our intellectual inheritance rather less than 10,000 years ago. …
I believe that Newton could hold a problem in his mind for hours and days and weeks until it surrendered to him its secret. Then … he could dress it up … for purposes of exposition, but it was his intuition which was pre-eminently extraordinary. His experiments were always, I suspect, a means, not of discovery, but always of verifying what he knew already.
Maxwell later said the same about Ampere’s discoveries in electricity, calling him “The Newton of Electricity,” and Einstein commented similarly about Maxwell’s own grand equations. All of them wrote down one-inch equations that absolutely described the physical world.
In late 1985 I left physics research and took a job at Goldman Sachs, doing financial research, which in my case meant building physics-style models of options and markets. I was one of the early so-called POWs — Physicists on Wall Street.
Finance was exciting, and at first it seemed a lot like physics. The traders were the experimentalists, and I was a theorist working with them. The mathematics was similar to what I’d grown up on. Soon I began to believe it was possible to apply the same methods successfully to economics, perhaps even to build a grand unified theory of securities. Along the way I published many papers and built many models, several of which are still widely used today.
Nevertheless … after 20 years on Wall St I’m a disbeliever in grand financial theories.
Theories and Models
In my forthcoming book, Models.Behaving.Badly I carefully distinguish between theories and models.
Theories first. I hope you remember the story of Moses and the burning bush in the book of Exodus. Moses, tending the flock of sheep of his father-in-law in the desert, saw a burning bush whose flame would not consume it. God, from within the bush, declared himself to Moses and commanded him to deliver the Israelites from Pharaoh.
Whom shall I tell them sent me? asks Moses, trying to play for time.
Tell them: EHYH ASHER EHYH, said the voice in Hebrew. It means I am that which I am.
God was punning on his true name: EHYH means I will be but it is also similar to God’s ineffable name Yahweh. Yahweh is declaring himself to be the irreducible substance out of which everything else is constructed. He is exactly what he is, he says, nothing more, nothing less. You cannot compare him to anything on earth. He is not a metaphor or analogy. Hence, no graven images please. About Yahweh you cannot ask ‘Why?’; you can only accept him as a fact.
That’s a good metaphor for how successful theories of the natural world work. Newton’s Laws for matter, Maxwell’s equations for light, Quantum Mechanics and Relativity for electrons – these theories are facts. They describe how the world works. You can discover them, but you can’t ask why they are true. As Goethe once wrote, The ultimate goal would be: to grasp that everything in the realm of fact is already theory.
Models are different. Models are metaphors or analogies. Calling the brain an electronic computer is a model. Calling a computer an electronic brain is a model too. These are analogies, based on similarity, not identity. They are graven images, useful but not very accurate.
Models tell you only what something is more or less like. Theories tell you what something actually is.
In economics one can make only models. The Efficient Market Model that has gone so badly awry compares stock prices to smoke diffusing through a room, and models them with the physics of diffusion. But those are flawed analogies, not theory or fact.
Therefore the similarity of physics and finance lies more in their mathematical language, their syntax rather than their semantics. There is no grand unified theory of everything in finance.
The world is not a model.
The Great and Ongoing Financial Crisis
About thirty years ago I worked with a friend who told me that his elderly parents used to fight each other tooth and nail, ceaselessly, trading insults and offenses. After listening to his blow-by-blow accounts of their battles, one day I asked him why his parents didn’t just divorce each other? They’re waiting for the kids to die, he said to me.
I’m reminded of this when I watch the world trying to come to grips with what has happened to economies and markets. During the past two decades the United States has suffered the decline of manufacturing; the ballooning of the financial sector; that sector’s capture of the regulatory system; stimulus whenever the economy has wavered; taxpayer-funded bailouts of large capitalist corporations; crony capitalism; private profits and public losses; the redemption of the rich and powerful by the poor and weak; compromised ratings agencies; government policies that tried to cure insolvency by branding it as illiquidity (Greece); and the widespread use of obviously poor economic models.
What Can Be Done?
The internecine arguments by economists in the daily papers show that a good part of economics is really about what is good for society and how to get it. Years ago Economics was part of what was called PPE – the triple fields of Politics, Philosophy and Economics. Economics was grouped with the moral sciences.
Nowadays Economics is grouped with MPNE – Mathematics, Psychology, Neuroscience and Economics. Economics is put with the traditional value-free sciences.
There’s nothing wrong with these fields on their own. But, if economics is about what’s good and how to get it, it can’t be value-free. It’s mathematical models are poor metaphors that are obviously and vastly inadequate. Its papers read like Euclid, with axioms and theorems, their faux rigor is inversely proportional to their minimal efficacy.
No model yet invented can tell you whether anything at all will go up or down tomorrow. The invisible worm at the heart of economics has been its dark secret love of inappropriate scientific elegance and scientism.
Markets and prices are generated by human behavior. The greatest conceptual danger in modeling human behavior is idolatry, which is a kind of pragmamorphism, imagining that someone can write down a theory that encapsulates human behavior and relieves you of the difficulty of constant thinking. A model may be entrancing but no matter how hard you try, you will not be able to breath true life into it. To confuse a limited flawed model with a theory is to embrace a future disaster driven by the belief that humans obey mathematical rules.
Economists think that matter is simple and that people can modeled similarly.
I want to conclude by quoting from a wise as well as brilliant nonpragmamorphic physicist, Schrödinger, the father of the quantum mechanical wave equation that bears his name. He knew that the apparent solidity of matter disguises the mystery that lies beneath. In 1944, summarized his personal views, he wrote:
My body functions as a pure mechanism according the Laws of Nature. Yet I know, by incontrovertible direct experience, that I am directing its motions … in which case I feel and take full responsibility for them.
Schrödinger didn’t shy away from the essential duality: the apparent conflict between scientists’ ability to discover nature’s mechanical laws and the autonomy that must nevertheless lie beneath any attempt to discover them. He concluded:
Every conscious mind that has ever said or felt ‘I’ … (is) the person, if any, who controls the ‘motion of the atoms’ according to the Laws of Nature.
The world is complex and you lose a lot by insisting that the things you don’t understand already fit into the boxes you imagine you do. Don’t be pragmamorphic.