Monthly Archives: November 2013

To Learn, Try

Luke Muehlhauser recently interviewed me as part of his Conversations series. Seeing the lightly edited transcript reminds me of why I usually write instead of posting transcripts. But with a little more cutting, I can find at least one satisfactory quote:

Some people have been brought up in a Popperian paradigm, where there’s a limited scientific method and there’s a limited range of topics it can apply to, and you turn the crank and if it can apply to those topics then you have science and you have truth, and you have something you’ve learned and otherwise everything else is opinion, equally undifferentiated opinion.

I think that’s completely wrong. That is, we have a wide range of intellectual methods, [and] some of those methods work better than others. … But honestly, there are very few topics on which you can’t learn more if you just sit down and work at it. … Of course, just because you can learn about almost anything doesn’t mean you should. It doesn’t mean it’s worth the effort to society or yourself, and it doesn’t mean that there are … easy ways to convince other people that you’ve learned something. … [Also,] it isn’t necessarily well-suited for being an impressiveness display. (more)

If an topic is important enough, just start to study it; if you are smart, then eventually you’ll make progress, and learn important things. Just don’t expect it to be easy to persuade or impress other people with what you’ve learned.

GD Star Rating
loading...
Tagged as:

Speculators Foresee No Catastrophe

In the latest American Economic Journal, Pindyck and Wang work out what financial prices and their fluctuations suggest about what speculators believe to be the chances of big economic catastrophes. Bottom line: [simple models that estimate the beliefs of] speculators see very low chances of really big disasters. (Quotes below.)

For example, they find that over fifty years speculators see a 57% chance of a sudden shock destroying at least 15% of capital. If I apply their estimated formula to questions they didn’t ask in the paper, I find that over two centuries, speculators see only a 1.6 in a hundred thousand chance of a shock that destroys over half of capital. And a shock destroying 80% or more of capital has only a one in a hundred trillion chance. Of course these would all be lamentable, and very newsworthy. But hardly existential risks.

The authors do note that others have estimated a thicker tail of bad events:

We obtain … a value for the [power] α of 23.17. … Barro and Jin (2009) … estimated α [emprically] for their sample of contractions. In our notation, their estimates of α were 6.27 for consumption contractions and 6.86 for GDP.

If I plug in the worst of these, I find that over two centuries there’s an 85% chance of a 50% shock, a 0.6% chance of an 80% shock, and one in a million chance of a shock that destroys 95% or more of capital. Much worse chances, but still nothing like an existential risk.

Of course speculative markets wouldn’t price in the risk of extinction, since all assets and investors are destroyed in those events. But how likely could extinction really be if there’s almost no chance of an event that destroys 95% of capital?

Added 11a: They use a power law to fit price changes, and so would miss ways in which very big disasters have a different distribution than small disasters. But to the extent that this does accurately model speculator beliefs, if you disagree you should expect to profit by buying options that pay off mainly in the case of huge disasters. So why aren’t you buying?

Those promised quotes: Continue reading "Speculators Foresee No Catastrophe" »

GD Star Rating
loading...
Tagged as: ,

Open Thread

This is our monthly place to discuss relevant topics that have not appeared in recent posts.

GD Star Rating
loading...
Tagged as: