Thursday, May 14, 2009

Irrational Pessimism

One of my close friends has written about irrational pessimism driving the economy down. Though I would like to take partial credit for injecting the thought into his head. He mainly talks about how people behave irrationally and how it affects markets.

My point-of-view is that people go with their animal instincts much more than their deterministic models. When someone senses danger, his/her reaction gets biased (for most people towards damage control and for a few others, towards risk taking). This precise difference in the nature and the magnitude of bias makes each one of us unique - and a pain for the economists to model.

If the economists also include this feature into the decision model (As the behavioral economics guys have been saying for sometime now ), then they wont be caught in awkward situations where the masses behave in a manner completely different from what they predict.

People don't always make choices based on their precise calculation of the odds. They go with what the feel is right - and the fact that most things can not be put in numbers directly also means that in translating things to numerical terms itself brings in the bias that the numerical analysis sought to avoid. Maybe the next step would be to model people based on a the major bias that they have - maybe conduct a survey and see in which direction and how much are people biased. And then predict things - that would certainly do a better job than what it does right now.


PS- (kidding alert )Irrational pessimism is the kind which can not be put in the form of p/q where p and q are integers and q is not 0. (/kidding alert)

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8 comments:

Oval said...

First of all, whatever be the post; PS is really nice, creative mind at work!!!

If, as you say, they are able to model people, then it would be a real success.

And thanks for injecting the thought, and then providing links to 2 of my posts. :D

Abhishek (UGRI) said...

He he mutually publicizing each other :D

In my opinion, a nicely put follow up post stressing upon the existential theory - Human beings are random.

Cheers!

Ankit Ashok said...

Haha

You write something similar to ours, we will publicise you too !

Ankit Ashok said...

I am not very sure if Human beings are indeed random - Our behaviors are shaped by our experiences, our genes, our thoughts, our environment etc.

There must be some method to this seeming randomness. "What can not be described by a mathematical equation, does not exist!"

Though in a way your observation makes sense - may be humans are indeed random, as in pseudo random number generators that we use all the time - We know its deterministic, but still generates numbers random enough for all practical purposes.

Abhishek (UGRI) said...

Attributing the random number generator to a characteristic nature also needs to be tackled. It also needs to account for the total number of characteristics we are talking about, which is again theoretical and subjective to many fallacies.

Abhishek (UGRI) said...

attributing a random number to*

Ankit Ashok said...

Ya, indeed - and thats one of the prime reasons why we dont have a paper on decision theory.

But a very thought provoking comment- May be I will write my next post on this only.

Abhishek (UGRI) said...

Waiting for it...