"It was deliciously intense and exciting to have been a part of creating LTCM (Long-Term Capital Management). For making it possible, I will never be able to adequately express my indebtedness to my extraordinarily talented LTCM colleagues. The distinctive LTCM experience from the beginning to the present characterizes the theme of the productive interaction of finance theory and finance practice. Indeed, in a twist on the more familiar version of that theme, the major investment magazine, Institutional Investor characterized the remarkable collection of people at LTCM as "The best finance faculty in the world." In long retrospect, unexpected roads happily traveled"."
http://nobelprize.org/nobel_prizes/economics/laureates/1997/merton-autobio.html
6 comments:
The 'Sveriges Riksbank' Prize in Economic Sciences.
Surely they meant the 'Sovereign Riskbank' Prize in Con-omic Sciences?
So Merton's education was paid for by the bankers who bailed out his LTCM (under the Fed's instigation)?
the name of the LTCM is oxymoronic, by the way. It was very short-term in its perspective and wasn't "managing" "capital" as much as leveraging. Its high returns -- and later its negative ones -- were the result of leveraging.
Jim
It seems that mathematical modeling is all the rage in nearly every field of quasi-science. In the hard sciences, wherein real things can be quantified and measured for comparative purposes, mathematics has always been a necessary tool in understanding the relationships between events in the real world. In the quasi-sciences, those fields of study wherein the intuitive understanding of events and phenomenon holds sway, mathematical modeling has come to serve the useful purpose of raising intuitive understanding to the level of the educated guess. If we can model it in numbers, how can it be wrong? Well an educated guess is right as often as it is wrong. So for a while the models hold and genius is its own reward. I wonder if those fat management fees, justified by the brilliance of the investment strategies which were the result of intensive mathematical study, were given back to the investors whose significant gains were all to naught once the strategies hit the wall of averse expectations?
I used to go around saying that Merton and Scholes were the first post-Nobel felons. I have been corrected, and apparently he just was hit with a half-million-dollar civil suit. And then you have Schleifer.
It seems to me that economics, if it is a science, is systematically ethically compromised in a way that no other science ever has been.
There are some fascinating comments by Joseph Stiglitz, he also a winner of that mislabeled Nobel related prize, in his review of Naomi Klein's new book, in today's NY Times book review section. Referring to Klein's opinions on Milton Friedman he notes, "There are many places in her book where she oversimplifies. But Friedman and the other shock therapists were also guilty of oversimplification, basing their belief in the perfection of market economies on models that assumed perfect information, perfect competition, perfect risk markets. Indeed, the case against these policies is even stronger than the one Klein makes. They were never based on solid empirical and theoretical foundations, and even as many of these policies were being pushed, academic economists were explaining the limitations of markets, for instance, whenever information is imperfect, which is to say always."
So if a guy of Stiglitz's stature states rather categorically that Friedman had the ideas of a simpleton, sorry I meant over simplifier, then why is he still accorded such respect as an economic theorizer. Klein makes the case for his, and his followers, complicity in the destruction of economies and the miseries of others. I'm a bit more facinated by the fact that in this very out of the way forum, a NY Times book review, an august economist finally has the balls to out Friedman as a blow hard with no empirical foundations.
the demand function for free market ideologies has been less unstable than friedman's crafted money velocity.
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