Sep

25

From the "The Perils of Pragmamorphism":

Anthropomorphism is the attribution of human characteristics to inanimate objects, that is giving inanimate objects the shape of humans. Pragmamorphism is attributing to humans the properties of inanimate things. It is naïve materialism. 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. 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. 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. Modern economists' mathematical models are poor metaphors that are obviously and vastly inadequate. (Their)papers read like Euclid, with axioms and theorems; (but) 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 breathe 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.

What should be added is the fact that human perception is itself dependent on the pattern recognition that only works by analogy. So, for better or worse, we are stuck with our mental models. Where economics goes against commerce itself is that it strives for complexity instead of simplicity. That makes sense if you are determined to never be clear enough in your ideas to risk their being falsified by experiment and experience. But it is a lousy way to run a railroad except, of course, if you choose the mass transit/high speed rail model where perpetual subsidies are guaranteed.


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2 Comments so far

  1. Alec Misra on September 26, 2011 12:38 pm

    Actually my experience is that the true propositions of economics (for example the quantity theory of money or the theory of comparative advantage) are not falsifiable, they are forms of tautology and should be considered true apriori, notwithstanding real world distortions. Economics should not therefore be considered a mere science, this being a common misconception people (including Dermann) share. It exists not to predict prices (which cant be done due to entropy) or to explain why men lie and cheat and so distort outcomes, but rather to describe the price setting mechanism in all its glory. Mises is the very best on this topic, read Human Action, freely available at the Mises.org website. 

  2. Emanuel Derman on September 29, 2011 9:33 am

    Not sure I understand all of what Misra says, but I agree that financial models never predict. That’s a misconception. They interpolate, as I explain in my forthcoming book Models.Behaving.Badly.

    I will take a look at Mises.

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