Saturday, 20 November 2010

Financial Restaurant Reviews as Science


Yesterday I was reading a selection of reviews for a restaurant we’re considering visiting in the near future.

I’m constantly amazed at the number of people who express total shock on receiving their bill and then have the temerity to complain about the cost. Every restaurant I have ever visited possesses a menu listing the prices of the various dishes on offer. All it takes is some simple mental arithmetic to determine how much you are likely to pay for a complete meal – it’s not exactly macro economic theory on par with sorting out Ireland’s financial catastrophe. It doesn’t even span the complete breadth of arithmetic – it’s merely addition.

To order a number of dishes without looking at the prices and then complaining of high prices after the bill arrives is a tad disingenuous, if not downright ignorant. To write a review on this basis is blaming someone else for your ignorance.

A few days ago I mentioned I was re-reading David Deutsch’s ‘The Fabric of Reality’. While he is a scientist, he highlights the problems associated with the scientific method, namely the problem of induction. This problem arises from using what can only ever be a finite number of observations and then extrapolating them into a general conclusion to cover all eventualities.

The usual manner of highlighting the problem of induction is using the fact that before anyone had ever seen black swans (which are native to Australia), everyone thought all swans were white – which nowadays we know to be plain wrong.

Deutsche maintains that because the laws of physics appear to obey certain rules in our part of the universe - on the basis of extrapolation from a (necessarily) finite number of observations - it does not mean to say these laws are 100% certain and a fundamental truth everywhere.

I have a problem with this, as most of our technology is based on the assumption that the laws of physics are immutable. If they weren’t then we’d have a number of weird situations, such as Microsoft Windows laptops frequently and inexplicably crashing for no apparent reason or aeroplane engines mysteriously bursting into flames.

On second thoughts….

The problem of induction is most manifest in financial markets, where some practitioners assume economics to be a science. They assume that because the price for some instrument or commodity has been rising for a period of time (the finite set of observations), it will always do so (the scientific conclusion) – that is until a crash happens, as it inevitably does at some stage in a terminally complex system.

Talking of financial situations, the Irish have insisted they will not raise the country's low corporation tax rate in return for a European Union-led bail-out. The buggers must obviously be praying to some saint and hoping for a bloody miracle.

I see Lord Young has resigned for telling it as it is over our own financial situation. Can’t have politicians telling the truth – whatever next? And before anyone jumps down my throat, it’s a fact that mortgages have never been cheaper and if a mortgage is your largest outgoing then you’re on a winner. Yes, there are some people who have been made redundant, but they are a very small proportion of the overall population. How many people do you know who have been made redundant thus far? Ill bet the majority know of no-one.

5 comments:

  1. Just because something doesn't always move in the same direction doesn't mean that it is not scientific (otherwise waves wouldn't be scientific). The current state of the economy of Ireland (and plenty of other places) seems to fit in well with "the science of economics". Part of the problem was that market analysts were attempting to apply mathematical models to predicting market movements which attempted to maximise individual gain (micro) and ignoring wider market movements (macro) as being unimportant in themselves. I think it's called the science of greed.

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  2. Alan: It's impossible to test economic hypotheses to verify theories - at least not without causing massive damage. Additionally theory cannot predict the unexpected event. I therefore follow Naseem Taleb in believing economics is on par with alternative medicine.

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  3. I don't care what the laws of physics are in another (as yet unimagined) part of the universe? I want a jet-pack that works in Berkshire!

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  4. On the subject of economics as a science:
    I once read a story about an Economics lecturer who asked the examination board to supply copies of previous exams for his students to practice. When the practice exams arrived he saw that the board had sent him copies of the forthcoming exam so he immediately contacted them to let them know of their mistake. He was told that it wasn't a mistake "...the questions are the same every year, it's just the answers that are different".

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