SERVING THE QUANTITATIVE FINANCE COMMUNITY

 
philosopher4hire
Topic Author
Posts: 5
Joined: August 19th, 2019, 9:23 am

Is economics a science?

August 19th, 2019, 10:06 am

Hello everyone!
 
I’m a philosopher, wondering about the World. Nothing unusual for a philosopher.
Anyway, I wrote some thoughts about the economics. A major part of it is about the quantitative math in economics. It is kind of “macro” and “how to save the world”, so I assume it should fit this forum. Since I’m interested in truth, before anything else, I’d like to ask a question to the professionals:
Could anyone prove me wrong in anything I wrote?
  
My text (http://philosopher4hire.eu/index.php?nr=3) is 7 pages long. This excerpt should let you feel what it is like:

For the technical analysis the fundamental assumption is the price move dependency. Technical analysis states that the future price moves are strongly dependent on the previous (past) moves. An analyst needs to search for patterns that repeat themselves. If the future moves of the price would be independent from what happened in the past (especially in the most recent past), then the technical analysis would be a lie.
The quantitative math uses the opposite assumption. All the probability based mathematics, which is the foundation for the quantitative analysis, requires each price move to be totally independent from the preceding moves. Exactly as it happens with the coin tossing (the favorite example of all quants, btw). The next result is independent from what you got previously. The probability of receiving tails does not depend on the number of previously received heads. If this assumption fails, then all the sophisticated economic quant math analysis is a lie. At least, for a mathematician.
If for example chemistry would be like economics, we could have two classrooms full of students. In one, they would be taught that one element cannot be changed into another during a chemical reaction. That such change requires a nuclear fusion. In the neighboring classroom, they would learn, that there are chemical reactions which can change one element into another. Especially, every ‘heavy’ metal like iron or lead can be transformed into gold in a special, alchemical reaction. We only have to discover such reaction.
It would be a perfectly reasonable approach, if only we would remove the no contradiction rule from science. ‘A science’ containing contradictions is not a science, but an intellectual mess.
 
User avatar
bearish
Posts: 5155
Joined: February 3rd, 2011, 2:19 pm

Re: Is economics a science?

August 19th, 2019, 1:17 pm

Let’s leave technical analysis aside. That doesn’t have much to do with economics or even finance, which seems to be your focus. Your characterization of the probabilistic modeling of asset pricing is wrong. It is true that in the basic theory the first moment of the increments of a price process is zero after we remove two drift terms: one accounting for riskless discounting and another for a risk premium. But both of those drift terms as well as all higher moments, in particular the variance, can happily be path dependent. So, I think you have a bit more homework to do.
 
philosopher4hire
Topic Author
Posts: 5
Joined: August 19th, 2019, 9:23 am

Re: Is economics a science?

August 20th, 2019, 9:04 am

Thank You very much for your response. I appreciate it. It is certainly a good starting point. Now, my reply:
 
It seems to me, you do not know the (mathematical) foundations of your knowledge. You use the term “variance”, while speaking of something that is “path dependent”. The variance in mathematics, as the entire mathematical probability, applies to independent events. You can’t just take the theory built for the independent events and say: “Now I will use it for the dependent events.” It is simply not mathematically (scientifically) valid. Perhaps this is the reason, why you have to deal with the “fat tails” term. Something unknown (=undefined) to mathematics.
Moreover, the “drift” term is undefined in case of a random variable. Or, precisely speaking, if there is any kind of drift, it is not a random variable. So, you cannot speak about “drifts” while staying on the ground of the mathematical probability.
 
The basic wiki search reveals:
Variance - In probability theory and statistics, variance is the expectation of the squared deviation of a random variable from its mean.
Random variable - In probability and statistics, a random variable, random quantity, aleatory variable, or stochastic variable is described informally as a variable whose values depend on outcomes of a random phenomenon.
Randomness - Randomness is the lack of pattern or predictability in events.[1] A random sequence of events, symbols or steps has no order and does not follow an intelligible pattern or combination.
 
This is exactly why I wrote: “[…] quant math analysis is a lie. At least, for a mathematician.” Mathematics is very strict. You cannot take just any numerical sequence (like the post codes in your area, or the prime numbers less than 1000), make calculations and say: “It’s the variance”. It is not. If you would read my entire text, you would have a better understanding of what I mean. And perhaps you would not try to treat it so lightly. But again: I want to thank You for your helping me!
 
As for the “Let’s leave technical analysis aside. That doesn’t have much to do with economics or even finance”. As a quant you may have such opinion. But the rest of the world sees it differently.
The wiki again:
Technical analysis - In finance, technical analysis is an analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume.
 
User avatar
bearish
Posts: 5155
Joined: February 3rd, 2011, 2:19 pm

Re: Is economics a science?

August 20th, 2019, 10:15 am

Funny. Sticking to Wikipedia, you should look up Itô calculus for an introduction to drift in the context of mathematical probability theory and kurtosis as a precise measure of fat tails in classical statistics. I am not a mathematician, but a number of prominent ones have made significant contributions to finance, including a certain Paul Wilmott... And technical analysis is to finance what astrology is to astronomy.
 
philosopher4hire
Topic Author
Posts: 5
Joined: August 19th, 2019, 9:23 am

Re: Is economics a science?

August 21st, 2019, 9:50 am

You haven’t read my text. It’s a pity. I have to repeat my argumentation here. But... I still want to know if there is any flaw in my thinking, and I hope you will finally spend the 20-30 minutes needed to read my article. And maybe, you will even think about it one evening? So, let’s try again:
 
Itô calculus, named after Kiyoshi Itô, extends the methods of calculus to stochastic processes such as Brownian motion (see Wiener process).
 
Good point. I forgot about it. But it is an advanced lemma, having many detailed mathematical constraints. Perhaps the Brownian motion fulfills them all. But the asset price path is not a Brownian motion. It is not a result of the laws of physics. It may look similar, but it is not enough to consider the application of Itô calculus to the asset price as scientific. I do see the difference between practitioners (who use what they have) and scientists (who should promote the real science).
 
In probability theory and statisticskurtosis (from Greekκυρτόςkyrtos or kurtos, meaning "curved, arching") is a measure of the "tailedness" of the probability distribution of a real-valued random variable.
 
Again “random variable”. You may try to use the probability to data, which you do not know if it is random or not. But using it to data, when you know it is not random (in many cases, at least) is deceiving. Yourself and others. Of course, only if you consider yourself a scientist. If you call it science. You may calculate the variance of the post codes in your region. If you see any practical application of such move. But do not call it science.
 
but a number of prominent ones have made significant contributions to finance, including a certain Paul Wilmott...
That’s right. It is also true for many rocket scientists, physicists, and so on. The finance sector pays well. But does it prove anything? I do not question their achievements in mathematics. I do question the application of the probability theory (and mathematics in general) to the world of the human minds. I suspect, Paul Wilmott knows, that such application is not very scientific (to put it mildly). But thinking realistically, I cannot hope he will admit it openly.
 
And technical analysis is to finance what astrology is to astronomy.”
An interesting comparison. I’ll put a longer wiki citation here:
 
Technical analysis -
In financetechnical analysis is an analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume.[1] Behavioral economics and quantitative analysis use many of the same tools of technical analysis,[2][3][4] which, being an aspect of active management, stands in contradiction to much of modern portfolio theory. The efficacy of both technical and fundamental analysis is disputed by the efficient-market hypothesis which states that stock market prices are essentially unpredictable.
 
It sounds very scientific. Don’t you think so? I suppose there must be many universities, where professors teach such knowledge. Otherwise, how could it stay on wiki for so long? How could it get there in the first place?
Are they all lunatics? Why don’t they see the obviousness?
If the quant math applied to finance would be like math applied to the universe (=astronomy), then why would scientists still use and develop the “finance astrology” (=tech analysis)? Why such things do not happen in physics?
Perhaps the quant math is not the astronomy of finance? Maybe it does only seem so?
Questions. Questions. Questions.
Very dangerous questions for someone so sure of what is right and what is wrong.
Perhaps, here is an answer:
http://philosopher4hire.eu/index.php?nr=3
 
Perhaps, it is the true answer?
But you would have to lose 25 min of your life on reading it…
Is it worth doing?
Maybe it is better to stick to what you know already?
 
User avatar
katastrofa
Posts: 8489
Joined: August 16th, 2007, 5:36 am
Location: Alpha Centauri

Re: Is economics a science?

August 21st, 2019, 1:53 pm

It's not even wrong.
 
User avatar
Cuchulainn
Posts: 60457
Joined: July 16th, 2004, 7:38 am
Location: Amsterdam
Contact:

Re: Is economics a science?

August 21st, 2019, 4:06 pm

It's not even wrong.
As Wittgenstein would say, it's a description rather than an explanation.
http://www.datasimfinancial.com
http://www.datasim.nl

Approach your problem from the right end and begin with the answers. Then one day, perhaps you will find the final question..
R. van Gulik
 
User avatar
DavidJN
Posts: 1738
Joined: July 14th, 2002, 3:00 am

Re: Is economics a science?

August 23rd, 2019, 4:24 pm

 ‘A science’ containing contradictions is not a science, but an intellectual mess.

Has mathematics resolved the incompleteness theorems (e.g. Godel)? That is a question rather than a statement.
 
User avatar
Paul
Posts: 9714
Joined: July 20th, 2001, 3:28 pm

Re: Is economics a science?

August 23rd, 2019, 4:45 pm

but a number of prominent ones have made significant contributions to finance, including a certain Paul Wilmott...
That’s right. It is also true for many rocket scientists, physicists, and so on. The finance sector pays well. But does it prove anything? I do not question their achievements in mathematics. I do question the application of the probability theory (and mathematics in general) to the world of the human minds. I suspect, Paul Wilmott knows, that such application is not very scientific (to put it mildly). But thinking realistically, I cannot hope he will admit it openly.
I've only been criticizing the subject for about a quarter of a century, openly, in public. (You ask other people to read but you haven't, not even wikipedia.) But my criticisms are based on many years before that researching in many, many other fields, some scientific some not. So I draw conclusions from a lot of experience. 
I haven't read everything you have written here. (You are probably mad, and we see this sort of stuff every few months here, so who has the time?) But it looks like you are missing the point. In a science you have three things to worry about: a) Getting it right, b) Publishing papers and c) Getting grants. Even that shows you are being naive, it's not just about promoting "real science" as you put it. So that's just three dimensions. In finance there may be a dozen dimensions. Only one is about getting things right in any scientific sense. And it's not very important. 
As a "philosopher for hire," what do you charge and what do people get for their money? I ask because I find it helpful if people can relate finance to the real world, and if you have real-world experience of running a business then you will understand the business of finance better.
 
User avatar
katastrofa
Posts: 8489
Joined: August 16th, 2007, 5:36 am
Location: Alpha Centauri

Re: Is economics a science?

August 23rd, 2019, 5:15 pm

Madness to ignorance is like deterministic chaos to randomness.
 
philosopher4hire
Topic Author
Posts: 5
Joined: August 19th, 2019, 9:23 am

Re: Is economics a science?

August 24th, 2019, 9:21 am

Hello Paul!
 
I was hoping to attract your attention. Therefore: Thanks a lot for Your response.
 
“I've only been criticizing the subject for about a quarter of a century, openly, in public.”
I do not want to steal your achievements. Not to mention, it would be impossible. I know, you have been criticizing various aspects of the quant math applied to finance (if that is what you meant as “the subject”). But does it mean, that no one else has the right for critics?
   
“(You ask other people to read but you haven't, not even wikipedia.)”
This statement is untrue. I’ve read some of what you have written. In fact, I was learning the quantitative math partially on your great book on this subject. But you are right, that I have not read the wikipedia article about you (if this is what you meant). I consider the wiki a fast source of knowledge usable to get the basic, scientific definitions. I do not trust it on other subjects.
 
But my criticisms are based on many years before that researching in many, many other fields, some scientific some not. So I draw conclusions from a lot of experience. 
I know. So do I.
 
I haven't read everything you have written here.
It’s a pity. Moreover, it does not testify well of you. Answering to someone, without taking the burden of spending 10 min on reading… Wasn’t that you, who criticized me for not reading what you have written just a moment earlier?
 
(You are probably mad, and we see this sort of stuff every few months here, so who has the time?)
This somehow explains your emotions. I have no experience of running such site, yet. I sympathize with your situation. But aren’t you a little too fast in your diagnosis? It sets me in a very uncomfortable situation. Writing: “I’m not mad” would put us into a sandbox.
 
But it looks like you are missing the point. In a science you have three things to worry about: a) Getting it right, b) Publishing papers and c) Getting grants. Even that shows you are being naive, it's not just about promoting "real science" as you put it.
We have certainly different views on what is (should be?) science. I suppose, your short description is the essence of the modern (western) science. I disagree with such approach, as it leads to what Lenin expressed as: “Capitalists will sell us the rope with which we will hang them”. Setting money as the central (the only?) point for everything is unwise. Questions like: ‘what for?’ and ‘why?’ should be asked. If not in science, then where? You call it “naive”?
Besides, I just ask if we got it right. I’ve published (the linked) papers. Can’t I do it without the immediate c) Getting grants?
 
In finance there may be a dozen dimensions. Only one is about getting things right in any scientific sense. And it's not very important. 
If you would just read what I wrote here, you could find:
"I do see the difference between practitioners (who use what they have) and scientists (who should promote the real science)."
One thing is finance – the traders’ race, where you use whatever you have and however you want. The other: science, which should explain the world. Which should tell us how the things really are. There is no need to reduce one to the other. They can be (and should be) distinct things.
 
As a "philosopher for hire," what do you charge and what do people get for their money?”
I have a different business model. Not everyone lives in your bubble.
 
I ask because I find it helpful if people can relate finance to the real world, and if you have real-world experience of running a business then you will understand the business of finance better.
I do not want to understand the business of finance better than I have to. I’m not eager to become another Paul Wilmott. My interests are much broader than finance. I just wanted to make sure, that what I wrote is flawless. As perfect as possible. But all people on this forum prefer writing to reading. Bad luck.
 
 
User avatar
Paul
Posts: 9714
Joined: July 20th, 2001, 3:28 pm

Re: Is economics a science?

August 24th, 2019, 4:55 pm

I admitted straight up that I'm not reading most of what you are writing. And I haven't read most of the latest. I have read enough to know that you also aren't reading what anyone is writing, or you are misunderstanding, deliberately or not I cannot tell. I am not reading because what you write isn't interesting or entertaining enough. What will I learn from it? That you get everything wrong, that you are unpleasant, that you are arrogant? I love arrogant people. Many say that I am arrogant. But they have to back up their arrogance with something concrete.

I think one of the interesting phenomena of the internet age is how easy it is for people to make idiots of themselves in public and forever and whether that is a good or bad thing. The pros and the cons are obvious, but I wonder what the end result, if any, will be. I do feel protective towards people who get everything wrong, and I want to help them not look stupid. But that protective instinct mostly disappears when they are unpleasant.
 
philosopher4hire
Topic Author
Posts: 5
Joined: August 19th, 2019, 9:23 am

Re: Is economics a science?

August 24th, 2019, 5:37 pm

how easy it is for people to make idiots of themselves in public
We both can agree with this one, at least. Good-bye.
 
User avatar
gardener3
Posts: 1496
Joined: April 5th, 2004, 3:25 pm

Re: Is economics a science?

August 31st, 2019, 4:43 pm

It's not even wrong.
No, it's actually wrong
 
User avatar
katastrofa
Posts: 8489
Joined: August 16th, 2007, 5:36 am
Location: Alpha Centauri

Re: Is economics a science?

August 31st, 2019, 5:16 pm

Cuchulainn, one for you...
ABOUT WILMOTT

PW by JB

Wilmott.com has been "Serving the Quantitative Finance Community" since 2001. Continued...


Twitter LinkedIn Instagram

JOBS BOARD

JOBS BOARD

Looking for a quant job, risk, algo trading,...? Browse jobs here...


GZIP: On