There is quite a bit of time before my prospective Clare Market Review article is due, but I figured it might be better to get started on it quickly. Two days ago I had produced about one side of brainstorming ideas. Two days thinking about it, and some time at my mum's house where many of my financial books are kept, and I have a decent first draft. The outline of the main argument is complete - my next tasks is to incorporate some additional material - mainly such sources as Mandelbrot's early work on non-Guassian distributions in finance and so ideas from Soros.
I have gone for the more controversial manner of presentation. The first section appears to dismiss the thesis that econometrics and finance theory are worthless but then introduces the problem they face in a more general way via Humean induction and links it to Taleb's turkeys in Black Swan. The second section discusses Knight and Keynes as economists who understood the distinctions between "risk" and "uncertainty". This enables me to suggests as a first position that econometrics and finance inhabit a domain that is "uncertain" in the technical sense. It links this to Mandelbrot's work in the 1960s but then notes how the dominant paradigm of econometrics and finance reject this insight. A contrast with Soros's views in the late 1980s onwards is provided (and gets another link to philosophy as the LSE into the paper).
The third section delves deeply into Taleb's argument about the non-observability of "generators" in respect of the domain in which social science investigates. The hidden generator is the link to "uncertainty" as defined. I also link this back to the Taleb LSE lecture and the "Four Quadrants" model that he presented there. This allows the basic argument against econometrics and finance to be stated clearly.
From there I move on to consider the current "Credit Crunch". This is presented as a "Black Swan" event caused by incorrect models of risk based on Gaussian distributions. Taleb's predictions about Fannie Mae are included here.
Finally I cover the very bare outline of what Taleb argues one can do about these kinds of events and finish with some aggressive quotes from the LSE lecture.
Hopefully I have produced something with the right combination of controversy and rigor. I plan another day's editing and then this can go off for comments. It is just over 4,000 words, which is the longest piece I have written on any subject for years.
By way of a change, I then rattled out a 1,000 word essay on Bayesianism for PH400. We haven't actually got this far yet in the lecture course, but I figured it would be interesting to see what I remembered from the reading I was doing over the summer. The paper is ok, but is due in on Tuesday, so it will just have to go in as it is. No time for re-drafts on this paper.
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