Tuesday, 14 July 2009

The mathematics used by economists is "rather useless" - Nicholas Taleb

In an article in the Financial Times today about the core notion that the world is drowning in debt, Nicholas Taleb, drops this little grenade into the mix.

Non-linearity makes the mathematics used by economists rather useless. Our research shows that economic papers that rely on mathematics are not scientifically valid. Not only do they underestimate the possibility of “black swans” but they are unaware that we do not have any ability to deal with the mathematics of extreme events. The same flaw found in risk models that helped cause the financial meltdown is present in economic models invoked by “experts”. Anyone relying on these models for conclusions is deluded.

For me, it is the consequences of this fetish by the financial elite for mathematical techniques which are basically "useless" that is more scary than the debt crisis itself. Few of our financial leaders would either agree with, or perhaps even understand the proposition that Taleb is asserting, and when you couple that with the obsequious respect paid to financial technocrats by other parts of the cultural establishment, one can be sure that no significant lessons will have been learned from the recent mishaps.

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