On Why You Really Hate Math and Economics
Commentary, Life Lessons Comments (1)
“Every man is proud of what he does well; and no man is proud of what he does not do well. […] The little he has done, comes to nothing, for want of finishing.” –Abraham Lincoln
Economist are driven crazy by humans, and math doesn’t help.
In a most amazing testament to the past strength of the economy, it resisted not only inflation, but commodity changes as the means of transporting supply for demand around the country (aka, high gas prices) it has absorbed the subprime mess and finally went down under bank runs.
FDIC pretty much cut out bank runs, because most people don’t have 100,000 in a bank account and they know their money is insured so they sit tight. Financial markets don’t work like that, and never will. Being in stock market or using an investment vehicle is pretty much gambling.
Infact, if it wasn’t for the bank runs, I’d say that only paper money was lost. Paper money is what you get when I say I’m going to give you $100,000 out of $1,000,000. Economically speaking you are 100,000 dollars more richer than you were 1 second ago. Realistically speaking potential has more attraction; and why people on DEAL or NO DEAL try to get the million even thou they are offered 100,000. It’s Schrödinger’s cat, both real and unreal at the same time.
Take a well known problem that drives economist crazy.
A) You have 20 dollars, and go to the store to by a $10 CD you have been waiting weeks for . On the way out of the store you the CD and scratch it all to hell. Do you go back into the store and use your last remaining $10. (Most people answer no)
B) You have 20 dollars, and go to the store to by a $10 CD you have been waiting weeks for. When you get to the counter, you realized that you’ve lost $10 somewhere. Do you still buy the CD. (Most people answer yes)
They are the same problem if you have not yet realized; You are still out $20 if you bought the CD, except in one, your marginal satisfaction has already been reached when you walked out of the store, and you do not need it fulfilled again, in the other, marginal satisfaction was not yet achieved. That’s the easy explanation.
How about this? I give you three doors. Behind two doors is a Goat, the other door a car. You must choose a door. No matter which door you chose, I will open a door that definitely does not have the car. Do you switch? The answer (contrary to popular belief) is to switch. Sometimes you have to let go to win. Don’t worry if you got it wrong, that simple problem causes fights among phd’s. Worse, the problem becomes unwinnable if I say… , I may open another door, or I can open another door meaning a I can just chose to open your door, and then you lose but only if I already know if it has a car or not. (Assumptions suck. Check the Link)
Back to bank runs:
The point is, someone has the information, the perfect information. The bank generally. But we don’t trust them. No reason to, and they often times deal in may and can. And that’s really why we are now in bad times, Lack of confidence in past choices.
Then again, I’d be pissed if I lost $10; and pissed I wasted time getting that stupid ass CD too.
OceansOfThought @ April 23, 2008
I think the line about potential being more attractive is a good one, potential often makes the case for taking the risk. I have always been a lucky person, which boils down to being a math enthusiast and a philosophical optimist; that is to say I take calculated risks, even when the rewards aren’t mathematically measurable.
I came to Milwaukee to attend college, site unseen, because Marquette had a good reputation and that outweighed the scariness of moving from a cornfield to the big city. I enrolled in engineering school where I knew I would be in the minority as a woman, but the prospect of being able to take care of myself with a great job outweighed the awkwardness I’ve intermittently felt.
I’m going to buy a townhouse duplex in a shoddy market because the appeal of finally calling somewhere my home (after 18 “permanent” moves) outweighs the possibility of having my rental unit empty for any amount of time. Most important probably, I’ve had my heart broken many times, but I continue to meet new people because the possibility of meeting the person that will be my confidant, my lover, my friend, so greatly outweighs the painful disappointment of someone that doesn’t like me back.
None of that makes me any different than most, my point is that people want to believe that in the end everything will turn out all right, but you can’t expect any measurable reward if you don’t invest in the risk to begin with.
Regardless of odds and human behavior, I still love math, but I’ll admit I’m not too fond of that Schroedinger and his cat torturing device.