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TagJames Tobin

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Don’t Worship Math: Numbers Don’t Equal Insight

The unwarranted assumption that investing in stocks is like rolling dice has led to some erroneous conclusions and extraordinarily conservative advice

My mentor, James Tobin, considered studying mathematics or law as a Harvard undergraduate but later explained that I studied economics and made it my career for two reasons. The subject was and is intellectually fascinating and challenging, particularly to someone with taste and talent for theoretical reasoning and quantitative analysis. At the same time it offered the hope, as it still does, that improved understanding could better the lot of mankind. I was an undergraduate math major (at Harvey Mudd, not Harvard) and chose economics for the much the same reasons. Mathematical theories and empirical data can be used to help us understand and improve the world. For example, during the Great Depression in the 1930s, governments everywhere had so Read More ›

Stock Market Management

Some Economic Models are Alluring, Others are Useful

In some markets, prices are affected by market forces and in others, like the job market, they are not

Statistician George Box is credited with the aphorism, “All models are wrong, but some are useful.” Unfortunately, as the brilliant economist Ed Leamer, once quipped, “Economists are like artists. They tend to fall in love with their models.” A large part of the art of economics is distinguishing between attractive models and useful models. The traditional bedrock of economics is the demand-and-supply model. Every introductory economics course explains how demand and supply are related to price and how the equilibrium price is where demand is equal to supply. This can be a very useful model for predicting how changes in demand and supply affect prices and trades — if we make the tempting assumption that the market price is equal Read More ›

Worried doctors and medical researchers on conference meeting, discussing possible solutions for resolving a world health crisis. Health and medical care concept. Selective focus.

Computers Excel at Finding Temporary Patterns

Which contributes to the replication crisis in science

The scientific method calls for the rigorous testing of plausible theories, ideally through randomized controlled trials. For example, a study of a COVID-19 vaccine might give the vaccine to 10,000 randomly selected people and a placebo to another 10,000, and compare the infection rates for the two groups. If the difference in the infection rates is too improbable to be explained by chance, then the difference is deemed statistically significant. How improbable? In the 1920s, the great British statistician, Sir Ronald Fisher , said that he favored a 5 percent threshold. So 5 percent became the Holy Grail. Unfortunately, the establishment of a 5 percent hurdle for statistical significance has had the perverse effect of encouraging researchers to do whatever Read More ›