I’ve argued previously that economics needs to learn from biology and incorporate more of a data-driven, natural history approach. While mathematical models have their uses, it often comes down to those stupid natural history facts. The first example is given to us by Christian Wyser-Pratte by way of Floyd Norris:
….you work at an investment bank for 30 years, have a reasonable draw and cash bonus, build up stock in the firm as most of your bonus, and when you decide to retire you request of the partners their permission to go limited. If they assent, you get to withdraw your money over five years, all the while continuing to expose the balance to the risks of the enterprise.
The new pay system post-Donald Lufkin Jenrette’s original I.P.O.: you’re a young 29-year-old punk playing with OPM (Other People’s Money), taking huge risks for which you get huge bonuses, while the outsiders shoulder the losses on your bets. You make all the money you’ll ever need in three years, stay around 15 years to pile up five times as much as you need, and then you retire with your cash hoard, buy a winery in Napa/Sonoma or a huge farm in Connecticut, living above the fray for the rest of your life.
Which system, do you think, makes people consider the downside of their actions?
No theory can account for this. I’ve also just finished reading The Devil’s casino: Friendship, Betrayal, and the High-Stakes Games Played Inside Lehman Brothers.
First, anyone who still believes in the efficient market hypothesis won’t after he or she reads Devil’s Casino (the fucking morons hypothesis seems more likely). But what that book, like Wyser-Pratte’s letter, also points out is how much of what happened really fell into the realm of sociology. If certain key people had been more involved, more aware, or a little less aggressive, Lehman might still exist today (in fact, it could have even blown past Goldman-Sachs).
These questions fall under the purview of social science (Yves Smith is right). Sadly, the social sciences are seen as lacking rigor, if not outright girlie (COOTIES! AAIIIEEE!!!). But I don’t see how one can make accurate predictions without having some knowledge of what’s really there.