My letter to the Financial Times: Modern financial theory has been built on a conceit

Published December 11th, 2017
Sir, I wholeheartedly agree with Gillian Tett’s column (December 2) covering the connections between finance and social sciences. Since the early writings of 13th-century theologians such as Thomas Aquinas, what we call economics had been taught as a broad discipline covering politics, society, ethics, husbandry and moral philosophy. But by the end of the 19th century, academics such as Vilfredo Pareto, Alfred Marshall and Thorstein Veblen had jettisoned humanistic thinking for their quantitative models based on equilibrium, efficiency and rationality. By co-opting methods from the physical sciences, a bewildering array of fancy-looking graphs and complex equations was soon spawned. Having stripped out the fuzziness of mortal endeavours, these neo-economists were freed to use their slide-rules on a quantitative version of our world. Modern financial theory has been built on the conceit that complicated equations and back-tested data can predict the human markets. While some economic theories may be logically coherent, they are unduly perplexing and horribly incomplete. Their Möbius-strip models go everywhere and arrive nowhere. Like faulty brakes, they don’t work when they are most needed — during a crash. For the rest of the 20th century, the cult of quants purged humanity from the study of finance. This was a big mistake. We don’t build businesses, work in offices, service customers or sell products to satisfy arcane algorithms. We pursue a very human set of needs: food, shelter, status, community and wellbeing. Economics needs to be re-centered on human and societal conduct — however messy and irrational it actually is. Aron Miodownik Cambrian Consulting, New York, NY, US

Upside-Down world of Finance

Darwin’s Piggy Bank allows baffled citizens to share their thoughts about the bizarre world of finance. As Bitcoins bubble and gold sinks to the dark recesses, economists glibly publish theories and financial models that are often worse than faulty safety belts, which cease to work when they are needed most – during a crash. Meanwhile, cunning Wall Street’s bankers create complicated financial instruments that cause irreparable harm to our society. Financial advisors have become  reverse “Robin Hoods” – stealing from the poor to give to the rich. Somewhere during the 20th century we seemed to have forgotten that economics should be centered on human behaviors, not backtested data, while our financial system operates like a super-organism – constantly adapting to new technologies, legal systems and environments. If we start to think about economies as an integrated ecosystem that suffers from the animal spirits of fear and greed, does that change how we should save and invest? What would Darwin make of our current state of affairs?

This blog is intended to engage and enrage in equal measure.