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Time: Are markets irrationally exuberant? Nobel Prize winning economist Robert Shiller believes they are. September 14, 2015

Posted by OromianEconomist in 10 best Youtube videos, 25 killer Websites that make you cleverer, Economics.
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???????????Trickle down economics

Shiller, a behavioral economist, closely tracks investors’ feelings about the market. He believes that emotions can hold the key to market movements. When I saw Shiller late last week for an interview about his new book on the economics of deception (“Phishing for Phools,” written with Fed Chair Janet Yellen’s husband George Akerlof), he told me more investors are worried that the market is over-valued than at any time since the peak of the dotcom bubble in 2000.

“Interest rates have been at zero” for a long time, says Shiller. “The economy has been viewed as sluggish, and yet [corporate] earnings have been growing and prices have been growing at a rapid pace.” That kind of “irrational exuberance,” says Shiller, is exactly what bubbles are made of.

So, why haven’t we seen a major sell-off, one more lasting than the dip we saw a few weeks back, after which the markets quickly rebounded? Because, says Shiller, investors are caught between two dueling narratives about the market.

First, there’s the “New Normal,” story, which is that we’re in a period of low interest rates that will last a long time, and that’s what’s kept markets up. This creates a sense of unease that our recovery isn’t real, but has somehow been genetically modified by central bankers.

“The aggressive monetary policy, which developed as kind of a new approach to managing [the economy] and was largely international, brought us these very low interest rates,” says Shiller. What’s more, “long rates are low, which represents some kind of public attitude that this [new normal] is going to go on for a long time.” As I have written many times, long periods of easy money always create bubbles. Meanwhile, says Shiller, “there’s another not so commonly-raised factor in connection with understanding the market: concern about inequality, which is rising, and also related to that a concern about information technology replacing jobs.”

Both of those things add to the sense that there is bad news lurking underneath those seemingly strong corporate earnings data of the last several years. That makes investors jittery.

But there’s another narrative. America is still the prettiest house on the ugly block that is the global economy. Where else can people park their money, if not in U.S. blue chips? Shiller adds that the growing sense that bad news may be looming can also “encourage people to accept high prices for houses and the stock market because they need to have something for the future.” Rising markets are supported by investors and consumers whoneed them to rise, because it makes them feel richer. “And they’re not going to say, “Oh, this price is too high, I’m going to consume this,” says Shiller. Rather, they accept the higher and higher asset prices – until they don’t anymore. That’s when the bubble bursts.

Those two dueling narratives may be one reason that markets have been volatile of late. People who hold equities have earned a lot of money — the stock market has gone way up. You could conclude, says Shiller, “I’ve got so much money, let’s go on a cruise! Let’s have a lark.” That sentiment drives consumer spending at the higher level. “But maybe you don’t because you’re worried. You have the sense that [things could change] — or maybe you’re worried about your children,” says Shiller. “In 20 or 30 years, I don’t know what they’re going to be doing. I’m just worried. Or maybe they’ll be doing horribly. So let’s keep that stock.” That in turn buoys markets. It’s a somewhat bipolar cycle that fits with the level of volatility we’ve seen all this year, which is much higher than last.

So what happens now? At some point, the market will receive some important new signal. It could be a rate hike from the Fed this week. Or it could be another raft of bad news from China. At that point, we’ll likely see another sell-off. The question then is whether it becomes a stampede. There’s no metric that will answer that question for sure. Emotions, as much as data, hold the key to what the markets will do. No wonder Shiller won the Nobel for saying as much.

How Emotions Are Affecting the Stock Market


General Theory of Reflexivity: George Soros’s latest thinking on economics and politics Lecture Series February 11, 2015

Posted by OromianEconomist in General Theory of Reflexivity, George Soro.
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Reflexivity, fallibility and uncertainty


In order to facilitate understanding of Soro’s theory, we are interested to reintroduce reflexivity as it is  defined and elaborated in Wikipadia as follows:

Reflexivity refers to circular relationships between cause and effect. A reflexive relationship is bidirectional with both the cause and the effect affecting one another in a relationship in which neither can be assigned as causes or effects. In sociology, reflexivity therefore comes to mean an act of self-reference where examination or action “bends back on”, refers to, and affects the entity instigating the action or examination.

To this extent it commonly refers to the capacity of an agent to recognize forces of socialization and alter their place in the social structure. A low level of reflexivity would result in an individual shaped largely by their environment (or “society”). A high level of social reflexivity would be defined by an individual shaping their own norms, tastes, politics, desires, and so on. This is similar to the notion of autonomy. (See also Structure and agency and Social mobility.)

In economics, reflexivity refers to the self-reinforcing effect of market sentiment, whereby rising prices attract buyers whose actions drive prices higher still until the process becomes unsustainable and the same process operates in reverse leading to a catastrophic collapse in prices.

It is an instance of a feedback loop.

In social theory, reflexivity may occur when theories in a discipline should apply equally forcefully to the discipline itself, for example in the case that the theories of knowledge construction in the field of sociology of scientific knowledgeshould apply equally to knowledge construction by sociology of scientific knowledge practitioners, or when the subject matter of a discipline should apply equally well to the individual practitioners of that discipline, for example when psychological theory should explain the psychological mental processes of psychologists. More broadly, reflexivity is considered to occur when the observations or actions of observers in the social system affect the very situations they are observing, or theory being formulated is disseminated to and affects the behaviour of the individuals or systems the theory is meant to be objectively modelling. Thus for example an anthropologist living in an isolated village may affect the village and the behaviour of its citizens that he or she is studying. The observations are not independent of the participation of the observer.

Reflexivity is, therefore, a methodological issue in the social sciences analogous to the observer effect. Within that part of recent sociology of science that has been called the strong programme, reflexivity is suggested as a methodological norm or principle, meaning that a full theoretical account of the social construction of, say, scientific, religious or ethical knowledge systems, should itself be explainable by the same principles and methods as used for accounting for these other knowledge systems. This points to a general feature of naturalised epistemologies, that such theories of knowledge allow for specific fields of research to elucidate other fields as part of an overall self-reflective process: Any particular field of research occupied with aspects of knowledge processes in general (e.g., history of science, cognitive science, sociology of science, psychology of perception, semiotics, logic, neuroscience) may reflexively study other such fields yielding to an overall improved reflection on the conditions for creating knowledge.

Reflexivity includes both a subjective process of self-consciousness inquiry and the study of social behavior with reference to theories about social relationships.

The principle of reflexivity was perhaps first enunciated by the sociologist William Thomas (1923, 1928) as the Thomas theorem: that ‘the situations that men define as true, become true for them.’

Sociologist Robert K. Merton (1948, 1949) built on the Thomas principle to define the notion of a self-fulfilling prophecy: that once a prediction or prophecy is made, actors may accommodate their behaviours and actions so that a statement that would have been false becomes true or, conversely, a statement that would have been true becomes false – as a consequence of the prediction or prophecy being made. The prophecy has a constitutive impact on the outcome or result, changing the outcome from what would otherwise have happened.

Reflexivity was taken up as an issue in science in general by Karl Popper (1957), who called it the ‘Oedipal effect’, and more comprehensively by Nagel[who?] (1961). Reflexivity presents a problem for science because if a prediction can lead to changes in the system that the prediction is made in relation to, it becomes difficult to assess scientific hypotheses by comparing the predictions they entail with the events that actually occur. The problem is even more difficult in the social sciences.

Reflexivity has been taken up as the issue of “reflexive prediction” in economic science by Grunberg and Modigliani (1954) and Herbert A. Simon (1954), has been debated as a major issue in relation to the Lucas Critique, and has been raised as a methodological issue in economic science arising from the issue of reflexivity in the sociology of scientific knowledge (SSK) literature.

Reflexivity has emerged as both an issue and a solution in modern approaches to the problem of structure and agency, for example in the work of Anthony Giddensin his structuration theory and Pierre Bourdieu in his genetic structuralism.

Giddens, for example, noted that constitutive reflexivity is possible in any social system, and that this presents a distinct methodological problem for the social sciences. Giddens accentuated this theme with his notion of “reflexive modernity” – the argument that, over time, society is becoming increasingly more self-aware, reflective, and hence reflexive.

Bourdieu argued that the social scientist is inherently laden with biases, and only by becoming reflexively aware of those biases can the social scientists free themselves from them and aspire to the practice of an objective science. For Bourdieu, therefore, reflexivity is part of the solution, not the problem.

Michel Foucault’s The Order of Things can be said to touch on the issue of Reflexivity. Foucault examines the history of western thought since the Renaissance and argues that each historical epoch (he identifies 3, while proposing a 4th) has an episteme, or “a historical a priori“, that structures and organizes knowledge. Foucault argues that the concept of man emerged in the early 19th century, what he calls the “Age of Man”, with the philosophy of Immanuel Kant. He finishes the book by posing the problem of the age of man and our pursuit of knowledge- where “man is both knowing subject and the object of his own study”; thus, Foucault argues that the social sciences, far from being objective, produce truth in their own mutually exclusive discourses.

In economics

Economic philosopher George Soros, influenced by ideas put forward by his tutor, Karl Popper (1957), has been an active promoter of the relevance of reflexivity to economics, first propounding it publicly in his 1987 book The Alchemy of Finance.[1] He regards his insights into market behaviour from applying the principle as a major factor in the success of his financial career.

Reflexivity is inconsistent with equilibrium theory, which stipulates that markets move towards equilibrium and that non-equilibrium fluctuations are merely random noise that will soon be corrected. In equilibrium theory, prices in the long run at equilibrium reflect the underlying fundamentals, which are unaffected by prices. Reflexivity asserts that prices do in fact influence the fundamentals and that these newly influenced set of fundamentals then proceed to change expectations, thus influencing prices; the process continues in a self-reinforcing pattern. Because the pattern is self-reinforcing, markets tend towards disequilibrium. Sooner or later they reach a point where the sentiment is reversed and negative expectations become self-reinforcing in the downward direction, thereby explaining the familiar pattern of boom and bust cycles [2] An example Soros cites is the procyclical nature of lending, that is, the willingness of banks to ease lending standards for real estate loans when prices are rising, then raising standards when real estate prices are falling, reinforcing the boom and bust cycle.

Soros has often claimed that his grasp of the principle of reflexivity is what has given him his “edge” and that it is the major factor contributing to his successes as a trader. Nevertheless, there is little sign of the principle being accepted in mainstream economic circles.

In anthropology

In anthropology, reflexivity has come to have two distinct meanings, one that refers to the researcher’s awareness of an analytic focus on his or her relationship to the field of study, and the other that attends to the ways that cultural practices involve consciousness and commentary on themselves.

The first sense of reflexivity in anthropology is part of social science’s more general self-critique in the wake of theories by Michel Foucault and others about the relationship of power and knowledge production. Reflexivity about the research process became an important part of the critique of the colonial roots[3] and scientistic methods of anthropology in the “writing cultures”[4] movement associated with James Clifford and George Marcus, as well as many other anthropologists. Rooted in literary criticism and philosophical analysis of the relationship of anthropologist, representations of people in texts, and the people represented, this approach has fundamentally changed ethical and methodological approaches in anthropology. As with the feminist and anti-colonial critiques that provide some of reflexive anthropology’s inspiration, the reflexive understanding of the academic and political power of representations, analysis of the process of “writing culture” has become a necessary part of understanding the situation of the ethnographer in the fieldwork situation. Objectification of people and cultures and analysis of them only as objects of study has been largely rejected in favor of developing more collaborative approaches that respect local people’s values and goals. Nonetheless, many anthropologists have accused the “writing cultures” approach of muddying the scientific aspects of anthropology with too much introspection about fieldwork relationships, and reflexive anthropology have been heavily attacked by more positivist anthropologists.[5] Considerable debate continues in anthropology over the role of postmodernism and reflexivity, but most anthropologists accept the value of the critical perspective, and generally only argue about the relevance of critical models that seem to lead anthropology away from its earlier core foci.[6]

The second kind of reflexivity studied by anthropologists involves varieties of self-reference in which people and cultural practices call attention to themselves.[7] One important origin for this approach is Roman Jakobson in his studies of deixis and the poetic function in language, but the work of Mikhail Bakhtin on carnival has also been important. Within anthropology, Gregory Bateson developed ideas about meta-messages as part of communication, while Clifford Geertz‘s studies of ritual events such as the Balinese cock-fight point to their role as foci for public reflection on the social order. Studies of play and tricksters further expanded ideas about reflexive cultural practices. Reflexivity has been most intensively explored in studies of performance,[8] public events,[9] rituals,[10] and linguistic forms[11] but can be seen any time acts, things, or people are held up and commented upon or otherwise set apart for consideration. In researching cultural practices reflexivity plays important role but because of its complexity and subtlety it often goes under-investigated or involves highly specialized analyses.[12]

One use of studying reflexivity is in connection to authenticity. Cultural traditions are often imagined as perpetuated as stable ideals by uncreative actors. Innovation may or may not change tradition, but since reflexivity is intrinsic to many cultural activities, reflexivity is part of tradition and not inauthentic. The study of reflexivity shows that people have both self-awareness and creativity in culture. They can play with, comment upon, debate, modify, and objectify culture through manipulating many different features in recognized ways. This leads to the metaculture of conventions about managing and reflecting upon culture.[13]

Reflexivity and the status of the social sciences

Flanagan has argued that reflexivity complicates all three of the traditional roles that are typically played by a classical science: explanation, prediction and control. The fact that individuals and social collectivities are capable of self-inquiry and adaptation is a key characteristic of real-world social systems, differentiating the social sciences from the physical sciences. Reflexivity, therefore, raises real issues regarding the extent to which the social sciences may ever be viewed as “hard” sciences analogous to classical physics, and raises questions about the nature of the social sciences.[14]

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