Thursday, September 2, 2010

The Economy : Uncertainty as the Way of the Future

Posted by Will Moredock on Thu, Sep 2, 2010 at 11:20 AM

Now that the war in Iraq is "over," it's time to deal with our economic woes. But don't get too optimistic. According to this Reuter's commentary, there are too many uncertain and unknowable factors to our modern economy and to modern technology to make investors or CEOs comfortable. If this is correct, we are in for a longer and rougher ride than our leaders have led us to believe. And the GOPers will be as powerless as the Democrats to fix it.

http://blogs.reuters.com/great-debate/2010/08/31/the-knightian-dog-ate-my-recovery/


Remember when business and economic leaders droned on about “100-year storms,” 2008’s get-out-of-jail free card for people who missed the housing bubble?

This was the whole idea that there was no way that people could be held accountable for the crisis because the notion of there being a problem with continual double-digit house price growth and sky-high leverage was just so darned unlikely.

Well, it looks like we have the 2010 version of how the dog ate their homework again and this time it is called “Knightian uncertainty.”

Over to European Central Bank chief Jean-Claude Trichet, who in a weekend speech at the Federal Reserve’s economic conference in Jackson Hole, Wyoming more or less said there is a biggish chance that he and his peers have no idea what is going on or what will happen next.

“Today, central bankers have to take decisions in an environment marked by a degree of uncertainty in the economic and financial sphere that seems to me largely unprecedented. … The acceleration of major advances in science and technology (not only information technology), the ensuing structural transformations of our economies, the ever-growing complexity of global finance and the overall process of globalisation are itself creating a multidimensional acceleration of change,” Trichet said.

“These phenomena contribute not only to a wider degree of uncertainty in underlying probability distributions, including fat tails. They also entail a much more significant element of Knightian uncertainty — that is, the type of uncertainty in which there is no underlying probability distribution.”

So, what is this Knightian uncertainty and why is it causing the price of our shares and houses to go down? Named after University of Chicago economist Frank Knight, it is the idea that there is a distinction between risks, which you can assign probabilities to, and uncertainties, which you just can’t fathom.

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anyone who follows the stock market realizes that Europe is where the U.S. is about a year ago! My main example being the recent Bank stress test's in Europe! Uncertainty usually provides oppurtunity.

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Posted by CHADAMAN on September 2, 2010 at 12:54 PM

Better global financial prediction, even in these times, is possible.

Everybody, read "The Black Swan: The Impact of the Highly Improbable' by Nassim Nicholas Taleb. He examines the influence of highly improbable and unpredictable events that have massive impact and are only recognized retrospectively.

In this Reuters article it is said .......“These phenomena contribute not only to a wider degree of uncertainty in underlying probability distributions, including fat tails. They also entail a much more significant element of Knightian uncertainty — that is, the type of uncertainty in which there is no underlying probability distribution.”

According to Taleb it is because no one plans for or accounts for anything happening along the front and back tails of the bell curve thereby ignoring a lot of the probability distribution.

The title "The Black Swan" is a reference to a 17th century philosophical thought experiment. In Europe all anyone had ever seen were white swans; indeed, "all swans are white" had long been used as the standard example of a scientific truth. So what was the chance of seeing a black one? Impossible to calculate, or at least they were until 1697, when explorers found Cygnus atratus in Australia.

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Posted by Guy on September 2, 2010 at 8:43 PM

Or, you know, we could not have an economy structured like the one we have now.

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Posted by mat catastrophe on September 3, 2010 at 12:22 AM

Or, you know, we could eliminate the collusion of interests between government, business, religion and science.

When those interests are separated, they keep each other in check. When they collude, some evil stuff happens.

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Posted by I P Yuengling on September 4, 2010 at 6:01 PM
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