An Alteration of Asimov’s Parable: The Paradox of the Efficient Market Theorem & Quantum Economics

“God does play dice”

Let me begin with a slight alteration to Asimov’s parable from Robots in Time –

A scientist travels two centuries into the future and is shown a civilization where mankind has succumb to the decadence of robots. When he returns and reports this, one of the persons who hears his account is a prototype human-looking robot. The robot then buries a note for the robots of the future to discover so that they can convince the time traveller that humanity will triumph.

The prior is an illustration of a paradox – the robot’s actions nullifies the original prediction; however, if the original prediction is nullified then the original prediction could have never taken place, and the robot could never have taken advantage of it; this in turn, nullifies the robot’s actions which allows the original prediction to take place, etc etc.

This is not only a problems posed by time travel, but it also illustrates a problem with any theory where a deterministic outcome is itself a variable for its own outcome. This is very much true in classical, neoclassical economics, and the efficient market theories – as I like to call them “deterministic economics” – where there is one expected outcome through the amalgamation of rational decisions. Markets are always optimal in the long run, where the price of the commodity reflects its true economic values -as Hayek referred to the markets as “telecommunication systems”, which disperses information via prices. However if decisions are truly made rationally, then they would have to take into account the prospects of the future; the expectations of the markets are thus a variable of rational economic decision making; this is especially true for investors and stockbrokers. Now, as exemplified in our version of Asimov’s parable, we have a paradox. If the models make a prediction, then the rational decision makers will now change their behaviors to take advantage of the prediction, nullifying the original prediction. Now if we predicted that the original prediction would be nullified, then that would nullify the original motive for rational decisions to change behaviors, etc etc.

Economics thus cannot be deterministic at least to be consistent with itself. Deterministic economics isn’t that far-fetched however. If we believe in rational decision making, then we would expect certain outcomes in both micro and macro – that which benefits the individual the most. This is exemplified by indifference curves on the micro-level and by market equilibriums at the macro level. And there is plenty of evidence to believe that both society and nature work in a rather rational manner.

However, countering this train of thought and an attempt to explain why, is the idea of how the rational decisions of individuals may inevitably manifest in unpredictable and irrational decision making. Decisions are interdependent; at least in well developed markets, no longer is only the utility of a product important (the useful-ness of the product to the buyer) but also is the perceived utility for others (the useful-ness of the product perceived by other buyers). This is especially true in the financial market but is also true for commodities, which are used as financial instruments. A stockbroker will not purchase stock that he himself thinks is valuable; the stockbroker will buy equities that he thinks others think is valuable. If all stockbrokers are thinking along these lines then they will buy the equities, which he thinks others will buy – equities that they think that others will think are valuable! The competition between rational players undercuts rational decisions until it manifests itself in seemingly unintuitive results. The markets thus will not act uniformly and predictably because there are constant outliers attempting to take advantage of the outcomes of the market. If the markets are indeed efficient as stated by the efficient market theory, then the individuals who try to capitalize on the efficiencies of the market inevitably make it inefficient.

It is important however to note that this may not apply or apply to the same degree for primitive markets, where the consumers are only concerned with consuming rather than investing; where the prospects of the market are not a variable (or not as much) in decision making. Perhaps these markets are efficient and works as Hayek depicted them, however the markets of today are surely much more developed.

How do we reconcile this fact in to our economic models, where a number of variables are simply inserted to get one correct answer? Perhaps the markets are not as efficient as we would like them to be. Perhaps Minskys’ theories on inherent market instability is more reflective of the truth. Perhaps our expectation for one answer is wrongly placed; perhaps there is no determined future to predict. As the ole’ quote from quantum physics goes “god does play dice”. Maybe like quantum mechanics, we should be attempting to find the probabilities of outcomes instead – call it “quantum economics”. Although this may also be affected by those outliers who work against such predictions, it would be much closer in reflecting reality – something our models need more of.

“God does play dice.”

Kai Matsuda

The Ferguson Ruling: Progressive America’s Hypocrisy

The courts ruled that there is not enough evidence to indict Darren Wilson, and America has responded with anger. I do not know whether Wilson is actually innocent or not, but regardless, the public’s response is unjustified. We live in a world of uncertainty. Of course, the ideal would be complete moral adherence, but our inability to know what is moral, let alone how to achieve it, has forced us to design and place trust in democratic institutions. After all, if we knew what was objectively right, then we could just operate through an enlightened dictatorship. But since we face an epistemological limitation, we turn to democracy.

In Ferguson, and in many other similar events, the public seems to have turned their back on these institutions. In particular, they already decided Wilson’s guilt, and only value the legal system’s ability to legitimize their belief. To them I ask, what is the point of courts? If the public is the judge and jury, what value do fair trials have? We must make a decision to either trust our institutions as they are now, or reject them as corrupt. And this demands consistency; if we believe our courts are credible, then we should respect the rulings that we disagree with, and if we believe they are corrupt, then we must protest the rulings that we agree with. To do otherwise would be to undermine the legal objectivity our justice system relies on. The protesters have no credibility because they are only willing to complain if the results do not go their way. If they truly believe the process is corrupt, then they should be prepared to protest even if Wilson is indicted.

I think the hypocrisy stems from a different conception of the nature of Justice. The protesters value an ends-based justice. They decide what outcome would be “just,” then label all other outcomes as unjust. The problem with this view is that it pretentiously assumes certainty. For example, how do the protestors know that Wilson is truly guilty? They may have a strong suspicious he is guilty, but they cannot know it with more certainty than that. Such an ends-based approach to justice is simply a pseudo-justification for being a sore loser. The other conception of justice is process-based. Here, justice is looked for in the process, rather than the outcome. If the process is just, then the outcome must also be just (even if wrong). This form of justice is superior since it reduces the intrusion of subjectivity and emotional irrationalities; it is based on a consensual agreement between various interest groups, with the understanding that each group will abide by the results even if it goes against their interests. This is why our legal system is based on a specific trial procedure: to mitigate the subjective act of casual judgment. The system is not perfect, but it is more perfect than judgment by public perception. The system also assumes innocence until proven guilty, under the moral assessment that it is better to let a guilty man go than punish an innocent man.

The other issue is the public’s inconsistent understanding of the legal system. On the one hand, they respect the expertise of the “lawyer class.” This is why we have decided, as a society, to require official credentials (Juris Doctor and the bar exam). On the other hand, the public contradictorily disrespects legal professionals, saying they are only acting on their biases without any elements of legal objectivity. If that is the case, then why even require credentials for lawyers and judges? If they are as biased as the rest of us in terms of legal understanding and interpretation, why not just let anyone be a legal professional? I believe that lawyers and judges are generally more legally objective than the population, and that they do a better job than the rest of us would do; this claim includes juries, which gain an aggregate objective legal perspective through their selection. Many of them understand the difference between a broader moral justice and legal justice. Although the law is meant to be an extension of morality, it must be more lenient in order to account for the consequences of our uncertainty (e.g. imprisoning an innocent man). As such, many times the legal system cannot pursue people that we generally believe are guilty. This is something lawyers and juries are much better at understanding than the public. For example, in the Trayvon Martin case, the Left was unanimous in claiming court corruption and injustice. They believed that George Zimmerman had murdered Martin (I believe this too), and so could only interpret Zimmerman’s acquittal as a case of bias. However, all of the lawyers I have seen talk on this issue said the jury made the right call. This even came from liberal lawyers who believed Zimmerman was guilty. There was simply not enough legal evidence to condemn Zimmerman, even if there was enough casual evidence. This is not to say that lawyers don’t face their own biases, but this is corrected for with a jury of peers (which was the legal body that made the Ferguson ruling).

To be fair, there are many credible criticisms of the Ferguson ruling. In particular, I think the request to see the evidence the grand jury based their conclusion on is valid. The issue is that the public is not consistent on to whom they give the benefit of the doubt. It is true the legal system is corrupt in many cases, but we should make a general assessment on the system as a whole, and provide our benefit of the doubt accordingly. The public seems to only extend a benefit of the doubt if the results coincide with their beliefs, and to assume foul play if the results are otherwise. This is nothing short of hypocrisy; the courts are not accountable to public opinion.