Thatcherism: The Irony of Economics

Nuance-onomics

We’ve previously looked at some of the evidence that suggests Studying Economics Makes You Mean.  The general idea is that learning about the market economy and the benefits of natural selection tends to make us less generous and less empathetic towards the travails of others.

However, like so much research quoted here this only offers up part of the story. It’s possible that we’re looking at a false correlation – it may be that it’s not studying economics that makes you a nasty grasping son-of-a-bitch but that you study economics because you already are one.  And, as usual, the truth is, at best, nuanced.

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Invert, Always Invert

I Wouldn't Start From Here

“All I want to know is where I’m going to die, so I’ll never go there” – Charlie Munger

Carl Gustav Jacob Jacobi was a nineteenth century mathematician famous for his work on elliptic functions, amongst other accomplishments.  Oddly he ends up being frequently quoted by Charlie Munger and Warren Buffett, despite having no known connection with the investment world.

Jacobi's great contribution to investor thinking was his maxim “man muss immer umkehren”: invert, always invert.  Of course, Jacobi was actually making a statement about mathematics, not investment thinking, but we shouldn’t much care where we get our models from, as long as they have the distinct advantage of being useful.

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Games People Play

Nobel Games

Game Theory is a theory of human decision making, and one that’s very popular in the dismal science: no less than thirteen of the forty four Nobel Prizes in economics have been awarded to practitioners in the area.  And, indeed, Game Theory is a powerful tool for researchers in many fields, the only problem being that if you give a man a powerful tool they’re likely to want to wave it around and use it on everything, regardless of taste and applicability.

Thus we find that Game Theory and behavioral economics collide in odd ways, which turns out not to surprising as the former is built on the foundations of the standard economic approaches.  Even so, a basic appreciation of the mysterious workings of economic gamers is an essential part of any investor’s kitbag of mental models.

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