I have never understood the infatuation with randomness. When I was first introduced to statistics at a very young age, I had a hard time at first trying to comprehend the paradigm in my own intuitive fashion. It seemed like something was off about it, where random chance was the cornerstone of a philosophy trying to describe and predict a decidedly non-random world. Rolling dice makes sense in the context of a board game.
It started in finance, going all the way back to Louis Bachelier’s Thorie de la Spculation from 1900. He wrote, ‘there is no useful information contained in historical price movements of securities.’ Essentially, he contended, markets start over every single day with new information that in every way supersedes and replaces any and all information obtained yesterday.
If that was to be applied to financial markets correctly, then this random walk might also apply to the economy. What is an economy after all but the exchange of goods and services, massive if informal marketplaces spread all throughout the system. In Robert Merton’s 1997 Nobel Prize lecture, one that he gave before LTCM would fail, he said:
Thus, I felt that working in economics could ‘really matter’ and that potentially one could affect millions of people. I also believed that my mathematics and engineering training might give me some advantage in analyzing complex situations. Most important in my decision was the sense that I had a much better intuition and ‘feel’ into economic matters than physical ones.
This post was published at Wall Street Examiner on June 5, 2017.
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