This Is the End


Markets, Risk and Human Interaction

October 25, 2012

A Crack in the Foundation of Economics -- Readings

October 25, 2012
Last year I did a post on a mathematical error that has dictated the direction of important work in economics, and more especially finance. The discovery of this error, by U.K. mathematician Ole Peters, has slowly gained some recognition, though for some reason the journal where the original paper was published has not been willing to publish this correction.

At its root the error is obscure -- as would inevitably be the case for it to have persisted for so long and for its incorrect conclusion to be relied on by such luminaries as Paul Samuelson and Kenneth Arrow. But more has been published about it after my post which do a better job at explaining the problem and its implications. So for those who are interested -- and you will be interested if you think about how a portfolio grows over time, how the policy for a group relates to the results for individuals, or the implications (correct and mistaken) of the St. Petersburg paradox -- I am providing links to them here:

The first is an interview with Ole by Michael Mauboussin, and the second is a paper by a group at Tower Watson. It is significant that the bulk of the notice for this is coming from industry rather than academics, and that the core group that is providing notice is the affiliated with the interdisciplinary Santa Fe Institute.