contradiction (or complementarity)?

It's a little bit of contradiction/complementarity between what i actually do at university and my new book.

At school we talk about rational expectations in macroeconomics, estimators in advanced econometrics and tests in applied econometrics - we learn how to take into consideration the improbable (the noise or the Lara Fabian's music - bien-connu example of M.Ringuede - University of Orleans), how to measure it and expect that on the whole everything tends to normality. Good arguments, even if the models work only with specific assumptions which don't reflect particularly the reality.

In "The Black Swan", the author, even if specialist in derivatives and measures of risk, assumes that our knowledge is limited and the improbable is the one that actually makes the history, while we have to admit that we cannot predict it. He says that we should admit that the "Black Swan" could appear any time and trying to predict its appearance makes us even more ignorant.

I always thought that good arguments give credit to good theories. Now, it's like i feel that the Black Swan could come up everywhere, any time (see the current crisis) even i fool myself with learning how to use the tools to measure the probability of its appearance. Still, it's a challenge to try to modelize the reality and the future, sometimes with the cost of specific assumptions.

from The Black Swan

... "the business world: inelegant, dull, pompous, greedy, unintellectual, selfish and boring". :)

Sometimes a good economist, like a good columnist, succeeds not by making a point before everyone else, but by making it better than anyone else. (from The Economist on the Nobel Prize winner).

phd comics

source: http://www.phdcomics.com/comics/archive.php?comicid=1077

belief

as i see things happening, i tend to believe that this crisis is not at all one based on manque de liquidite, but on manque de confiance. and apparently this confidence cannot be recovered from one day to another. the governments have met to say to the world and to the markets that things are under control: the first day after - the stock market went up with some considerable percents but then they fell again. explanation: in my humble opinion (trademark denis' thoughts), confidence on markets has long way to recover. thus, i think treating this crisis with liquidities does nothing but harm the market in the long run. it's like when you go to doctor to treat your migrena and he gives you pills for constipation. am i wrong?

interesting assumption of warren buffett, the one who earns a lot from this crisis: in a century the dow jones raised from 66 to 11,497, so on long term the market is increasing. so it is worth playing on the market. his belief: Be fearful when others are greedy, and be greedy when others are fearful!

for a pertinent reason

of why krugman won the prize: http://www.voxeu.org/index.php?q=node/2463. written by dixit, the one that some thought could have won the prize with krugman as he helped to the development of the new trade theory.

for a very good analysis

... of what is going on on the markets and what it is to be predicted (in romanian, for the world):

http://stoica.hotnews.ro/the-day-after-tomorrow.html

i'll talk about this later on...

and the prize goes to...

Paul Krugman. Yeah! This morning, this funny thing happened to Mr.Krugman!

I found the news before the macroeconomics lecture. He got the prize for the new trade theory i learned about exactly one year ago at Orleans, for improving the well-known models of Ricardo and then HOS.

Now what strikes my mind is what anutza told me yesterday: if you want to prove something in economics, you just fix the variables you don't care about and, in this way, arrive to what you looked for. Still, an econometrician would definitely not agree. :) Anyway, i think a model can always be improved and done more complicated :) moreover, revolutions in this huge domain of economics could still apear!

As for the implications on the actual world economic situation, there are, no doubt, some implications... we shall see the results...

Do you speak economics? Yes, I do!

Econosofia for me? The greatest challenge and responsability. The supreme motivation and moment when I truly defined myself. Is that "if it wasn't, i wouldn't be here".

It means rebuilding a bold idea, investing in wonderful people, projects through which we hope to change the world. It means meetings prepared one night before, tasks and to-do lists, the convincing approach to persuade your partners that your bold idea worths their support, stage fright before the beginning of a project and talking about Econosofia with a trembling voice. And all of this, so that, in the end, you have the recognition through the smiles of your team mates and that wonderful feeling of accomplishment.

Econosofia is knowledge and the determination to improve. This is what defines every student that passes or has passed through the Econosofia school. It’s the Noica's “you never know who gives and who receives”.

how-is-the-crisis-affecting-us-?

http://blogs.reuters.com/ask/2008/10/08/how-is-the-crisis-affecting-you/

indeed we (i.e. students (in economics)) are hedged at this moment, even if effects on real economy will probably appear soon. looking through some comments on this article, we realize how this meltdown affects people, from the high to the middle and low class. it looks like as the risk aversion goes down, the degree in which they are affected goes up...

• we are not paying anymore CEO salaries. we are old and retired and they are entirely too greedy.
• getting another job, cutting use of water, electricity, gas consumption, eatting out, switching to lower cost internet, phone and TV service, sold one car.
• eating out less, delaying capital purchasing, planning less and shorter vacations, reducing gifts at holiday time, wearing older cloths and not replenishing wardrobe, washing my own car, cutting our own lawn, raking our own leaves, cleaning our own gutters, painting ourselves instead of hiring a painter, consuming more leftovers, making sure dishwasher and wash is full before doing and worrying about our retirements, our children and our financial stability.
• my credit card had expired, and for that i won’t buy clothes, electronics machines, travel and heath/education.
• we’re not buying any Christmas gifts this year. instead we’ll spend about half of what we did last year and donate that money to charity - no expensive electronics or clothes for us. No winter vacation. we’re taking our lunches to work, and cooking dinners at home (and eating left overs the next day). [...] Our goal? To go back to a much simpler life. Reuse, recycle and rely on nothing but cash. No frills.
• This crisis is affecting my peace of mind. I used to think all these central bankers, economic theorists, and outrageously paid CEOs were really super-duper smart and were too smart to let a crisis like this happen. Now that I know they are just human like the rest of us and that they can make mistakes, leaves me feeling nervous and agitated.

romania and the crisis

read the revista22 interview with bogdan baltazar for a reasonable analysis!

good question: why don't we learn about economic crises from the big economics books?

take a look on this post on freakonomics and to the one related to it in economic principals. they point out a good question: why the famous economists who wrote the famous books on economic principles don't dare to talk about economic crisies.

all i can say about economic crises is related to the big crash in 1929, the oil crisis in the 70s and then the developing countries crises in the 90s. each of them had at that time quite obvious causes: declick on the financial markets, contagion and then effects on the real economy. the declick had itself a cause - the error of not considering (on purpose or not) that the market couldn't support the risk that some guys were taking (this in the case of the 90s' crises i studied a bit in the past). and then, what to do in order to avoid them, who are the guilty ones, how to reglement the capital market that we have learnt it's the most closest to the perfect market, thus free market, and so on... - questions that receive mostly non-measurable and clear answers.

on the other hand i understand the principles of economics are based on some basic simple models who consider the risk of crises only in the noise (error term) and that, on average, we do not expect tomorrow any crisis. thus i think that the one who will find the model who takes into consideration the probability for crisis like a nice and colourful variable will deserve the nobel prize. what happens these days offers, no doubt, a lot of incentives to find that model. but it will take some time for the market to settle down and after that to find it. so, it's quite not realistic that we (our generation) will catch that nobel prize, but who knows??!!

in the end, i just point out what Walter Bagehot* (1826-1877) said about crises, but, at that time with no solution for today:

[...] one thing is certain, that at particular times a great deal of stupid people have a great deal of stupid money…. At intervals, from causes which are not to the present purpose, the money of these people – the blind capital, as we call it, of the country – is particularly large and craving; it seeks for someone to devour it, there is a “plethora;” it finds someone, and there is “speculation;” it is devoured, and there is “panic.”

* more about him in economic principals

and a nice youtube video from the Mankiw's blog on the explanation of this meltdown:
http://www.youtube.com/watch?v=_o4IcNbfPMA&eurl

about writing or the reason for blogging

from [dilema veche - andrei plesu]:

writing is not putting on paper what you try to find out, it's the search itself. expressing yourself in written words is the guarantee of the fact that you understood what you wanted to. you cannot understand something before you express it. [...] the writing takes you farther than your own thoughts.

hedging these days

my mathematics' professor here at hec lausanne (m. schuerhoff) was telling us a few days ago how we (as students in economics/finance with some "little" differences) apparently are highly more hedged in our investment in human capital than any other guy investing on the capital market. he was referring, of course, on our investment in mathematics (for economists) knowledge, assuming that in the future the financial and economic world, on the whole, will need more and more maths stuff in order to measure the risks and thus find solutions to reduce them.

on short term, i suppose he's right: we do not get touched by any risk. even if still, on short term, our ROI is not so measurable/attainable. but on the medium & long term, shall we be credible as saviours (/policy-makers) of such predictable (??!) crashes?

could the role of maths increase at a such high scale that the regulatory measures on the market will not be needed? in other words, research from a mathematical perspective could save the market, the stock market so that it remains free? liberals/libertarians, any mathematical solution to this mess?

MIT lectures on matrix algebra...

... is gold: http://video.google.com/videoplay?docid=-7254479149869222300.

just enjoy!

quote

At first sight it is curious that a subject as pure and pasionless as mathematics can have anything useful to say about that messy, ill-structured, chancy world in which we live. Fortunately, we find that whenever we comprehend what was previously mysterious, there is at the center of everything order, pattern and common sense. (B.H.P. Rivett, 1978)

... and as i was saying some days ago, common sense is quite rare these days. maybe we just got too more of it, or not...

p.s.: quote discovered in Sydsaeter and Hammond's maths book.

global electoral college

i've just taken a look over http://www.economist.com/vote2008/?sa_campaign=publisher/september/gec/ and apparently the "world" votes for obama. in europe, the highest percentages for mccain occur in slovakia (46%) and poland (35%).

romania is 79% for obama! thus my country represents my option! which is good!

on the other hand, i wonder how an the economist's survey (as the ones who vote are, obviously, the economist fans and, thus, obama fans) could not end up with, averagely, a pro-obama result.