tag:blogger.com,1999:blog-4039434.post211164305966967803..comments2024-02-26T06:46:53.171-05:00Comments on Rajiv Sethi: On Animal Spirits and Knee-Jerk ReactionsRajivhttp://www.blogger.com/profile/13667685126282705505noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-4039434.post-27018182639151949062009-12-08T11:11:24.416-05:002009-12-08T11:11:24.416-05:00John, thanks for this thoughtful and informative c...John, thanks for this thoughtful and informative comment.Rajivhttps://www.blogger.com/profile/13667685126282705505noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-13902238654907618632009-12-08T09:43:49.046-05:002009-12-08T09:43:49.046-05:00What Shiller and Akerlof have shown in Animal Spir...What Shiller and Akerlof have shown in Animal Spirits is that the structural models of the individualistic "rational" processing that entrepreneurs, workers and consumers are assumed to use in RE and DSGE modeling have little correspondence to how they actually think or how they behave. <br /><br />When the assumption that actors have perfect information and computational brilliance generate nonsensical predictions, a less than complete set of information is reverse engineered into the model to get the model to predict behavior consistent with stylized facts. To make the model work the modeler makes arbitrary assumptions such as the Calvo updating is once every X months not 2*X months or 0.33*X months. Without exactly the “right” delay, the model blows up, so the model maker chooses an updating periodicity that generates aggregate behavior similar to the recent past in simulations. Ask yourself this question. Why might it be rational for market participants to update their judgments about market conditions on a fixed timetable? As soon as you ask the question it is clear that reasonable people would increase the frequency of updating when they start suspecting a speculative bubble is forming or a large investment bank may implode. <br /><br />But then an event such as the Russian or Lehman Default or the bursting of a DotCom or housing bubble forces the analyst to throw the old model out and build an entirely new one. What good is a theoretical framework that fails to warn us that there is an elephant in the TV room. What good is a theory that must be completely rebuilt when the elephant knocks down a wall holding up the roof. <br /><br />Akerlof and Shiller are saying economists will not be able to model and predict the economy we actually have (rather than the idealized RE and DSGE models we simulate in our computers) until we recognize that social norms, beliefs about justice and fairness, regulatory capture, herd behavior, looting and animal spirits influence what it is rational for rational actors to do. <br /><br />Their insights are not that economic actors are irrational, it is that the characterization of rationality and of markets found in RE and DSGE models ignore important parts of the human psyche and how we relate to and influence each other. They are calling for a root and branch reconstruction of macroeconomics. <br /><br />I am with you Rajiv. Behavioral economics is not the answer. Let’s see how far non linear ecological models can take us.Unknownhttps://www.blogger.com/profile/15237213913707853315noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-72705074853650624212009-12-07T15:47:42.643-05:002009-12-07T15:47:42.643-05:00great blog!great blog!Michael Bishophttps://www.blogger.com/profile/13144870793323861373noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-5910857134544928952009-12-07T09:14:24.763-05:002009-12-07T09:14:24.763-05:00I am not an economist, but my reading of the behav...I am not an economist, but my reading of the behavioralists is that that they explain limits to modeling, and that is their value.<br /><br />To say, ok fine, now that you've explained why our old models are bad, please give us new ones ...<br /><br />To what degree is that a typical human request for answers? Does that ever imply convenient answers? Cue Taleb.john personnahttps://www.blogger.com/profile/16449440713042469202noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-46921583949552939562009-12-06T20:56:37.657-05:002009-12-06T20:56:37.657-05:00Yes! Absolutely right. I missed Mark's comment...Yes! Absolutely right. I missed Mark's comment at the time but I felt exactly this way when I read <i>Animal Spirits</i>.<br /><br />I do firmly believe in the potential for behavioural economics (perhaps cognitive economics would be a better term) to better explain the macroeconomy <b>at some point</b>. But Shiller and Akerlof are nowhere near providing a model that can do it.<br /><br />As an aside, my view is that behavioural phenomena in finance are much more relevant to the investors than the professionals; but even there, there is much more work to be done.<br /><br />The ideas you're expressing in this blog seem to be pointing in the right direction, and I hope my own research will make a contribution too. A short outline I wrote earlier this year is <a href="http://www.voxeu.org/index.php?q=node/2814" rel="nofollow">on VoxEU</a>.Leigh Caldwellhttps://www.blogger.com/profile/16150868700502562500noreply@blogger.com