Schoonmaker and Economics (long)

[Al Schoonmaker]

My collegue at Carnegie-Mellon's business school, Herbert Simon, won the Nobel in Economics precisely by pointing out that businesses do NOT try to maximize profits and that assuming they do has severely negative consequences.

Your remarks about not judging one discipline by the standards of another are particularly relevant here because Herb was trained as a political scientist. If he had been indoctrinated into the "people are profit-maximizers" mindset, he might never have done his revolutionary work.

One of the greatest things about being part of CMU's multidisciplinary faculty was being required to explain our research to people from other disciplines. I and others often found that we could not satisfactorily explain our work to "outsiders." We had been surrounded by others whose assumptions and experiences were similar to our own, and we did not know how to explain our work to people with different backgrounds.

Another poster made the point that the media are the worst simplifiers. I certainly agree.

I love the way this thread is developing, and I hope it continues. Thanks to everyone who has contributed to it.

Al

[jrz1972]

[ QUOTE ]
One of the greatest things about being part of CMU's multidisciplinary faculty was being required to explain our research to people from other disciplines. I and others often found that we could not satisfactorily explain our work to "outsiders." We had been surrounded by others whose assumptions and experiences were similar to our own, and we did not know how to explain our work to people with different backgrounds.

[/ QUOTE ]

This is one of the reasons why I think interdisciplinary dialogue is useful. Good point.

[alThor]

[ QUOTE ]
My collegue at Carnegie-Mellon's business school, Herbert Simon, won the Nobel in Economics precisely by pointing out that businesses do NOT try to maximize profits and that assuming they do has severely negative consequences.

[/ QUOTE ]

Name dropping and exageration aside, I think he did a little more than "point out" the obvious.

This observation is not the point. The point regards your flawed judgement of classical economics. Here is what you wrote in your article:

For over a century that desire for simplicity caused economists to ignore contradictory evidence and base their work on three ridiculous assumptions.

I can only assume you mean the 18th and 19th centuries, since...

...3. They work in perfect markets.

Wow, way to ignore entire branches of economics that have been around for decades. I'll be sure to tell my colleagues that the following fields and papers don't exist: General Equilibrium with imperfect markets (includes classics from the 70's, field still going strong); Game Theory, particularly with asymmetric information (Akerlof 1970, Spence 197? are classics, one could reference Harsanyi from the 60's, the field is huge); countless other papers in other areas that use market frictions...the list is almost endless. How many people in these fields have won Nobel prizes, since that seems to carry weight for you? Answer: more than 2.

"If [Simon] had been indoctrinated into the "people are profit-maximizers" mindset, he might never have done his revolutionary work."

I am probably wasting my time, but you still don't get it. This isn't about whose cult is better. The issue is not whether people "really" are profit-maximizers. The issue is whether economic models provide value (e.g. predict well, fit data, etc.). This point is repeated in the very post (benfranklin's) to which you are replying! Yet when you say "mindset" you seem to think of this as a clash of religions.

Bash all you want, but understand the field first. Don't worry; this will be my last post on the matter.

alThor

[benfranklin]

[ QUOTE ]


Your remarks about not judging one discipline by the standards of another are particularly relevant here because Herb was trained as a political scientist. If he had been indoctrinated into the "people are profit-maximizers" mindset, he might never have done his revolutionary work.



[/ QUOTE ]

Interesting that the subject of political science enters the discussion. Poli Sci, like Econ, is a study of group behavior. More interestingly, the two disciplines evolved (or diverged) from what was once called Political Economy. The classical assumptions used in Intro to Econ courses come from the classical works in Political Economy (Adam Smith, et al.). Smith's "invisible hand" is based on the assumption of individual maximizing behavior. These assumptions are as much political science as they are economics.

Modern economists do not believe that individuals are rational consumers, or that every business is a profit maximizer. They believe that in the aggregate, the economy more or less acts as if this was true, and that therefore, this is a simple, understandable model. It is a good place to start teaching Principles of Economics at a basic level, and it has good predictive capability.

Do chemists believe that molecules look like Tinker Toys:


No. They believe that this is a good model, useful for teaching the basic concepts of chemistry to new students. It's a simplification [img]/images/graemlins/blush.gif[/img] , a tool. It isn't reality. No economist believes that in reality all businesses (or even any one business) is driven 100% by profit maximization. But as a concept or model is a useful tool.

[Al Schoonmaker]

You wrote: "Don't worry; this will be my last post on the matter."

I certainly hope that you change your mind and continue to comment. I welcome all comments, even those which criticize me.

Thanks for commenting.

Al

[goofball]

I just wanted to add that models are a useful tool in all disciplines.

Almost everything one learns in fresman physics is technically incorrect, but there is no way to learn higher stuff without first learning the "wrong" concepts.

[Lawrence Ng]

[ QUOTE ]
Likewise with poker. Ed Miller recommends to "value bet the river with marginal hands" in small stakes games (the only kind I play). We would all agree that if you blindly say to yourself "I have a marginal hand; therefore, I am betting this river" every single time, you are not playing at an expert level. However, that doesn't make the rule worthless as a general guide. What separates the expert poker player from the pretender is that the expert knows when to deviate from the general guide.

[/ QUOTE ]

But this marginal bet represents a form of potential revenue increase (using a poker model that is). As I remember correctly from my Economics 100 studies, any business that seeks to maximize needs to have marginal cost = marginal revenue. So betting this hand (MC) because of +EV would make a lot of sense in terms of the extra bet gained (MR), correct?

Lawrence

[Lawrence Ng]

[ QUOTE ]
That was an excellent post. Few people ever "get it" when it comes to economics, and are left wondering why the field exists.

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I hold a Bachelor's in Economics, and I too agree that it is a field of study that is highly underrated. Economics is built around models that attempt to explain how things work in a perfect world, but so often is not the case making it a very impractical subject. But combined with a field of study in Commerce and a good understanding of Finance and Business and the study of Economics lends itself together forming a duo chain that is very useful.

Lawrence

[jrz1972]

[ QUOTE ]
[ QUOTE ]
Likewise with poker. Ed Miller recommends to "value bet the river with marginal hands" in small stakes games (the only kind I play). We would all agree that if you blindly say to yourself "I have a marginal hand; therefore, I am betting this river" every single time, you are not playing at an expert level. However, that doesn't make the rule worthless as a general guide. What separates the expert poker player from the pretender is that the expert knows when to deviate from the general guide.

[/ QUOTE ]

But this marginal bet represents a form of potential revenue increase (using a poker model that is). As I remember correctly from my Economics 100 studies, any business that seeks to maximize needs to have marginal cost = marginal revenue. So betting this hand (MC) because of +EV would make a lot of sense in terms of the extra bet gained (MR), correct?

Lawrence

[/ QUOTE ]

In a vaccuum, yes.

What I'm getting it is that good poker players don't just blindly bet the river with marginal hands because that's what the simple rule tells them to do. They evaluate whether their opponent is tight or loose, the texture of the board, whether there are other opponents in the hand, their own table image, etc. and then decide whether this is a time to follow "the rule" or whether this is a time to deviate.

Blindly following the rule = +EV
Knowing when NOT to follow the rule = ++EV

[mosquito]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Likewise with poker. Ed Miller recommends to "value bet the river with marginal hands" in small stakes games (the only kind I play). We would all agree that if you blindly say to yourself "I have a marginal hand; therefore, I am betting this river" every single time, you are not playing at an expert level. However, that doesn't make the rule worthless as a general guide. What separates the expert poker player from the pretender is that the expert knows when to deviate from the general guide.

[/ QUOTE ]

But this marginal bet represents a form of potential revenue increase (using a poker model that is). As I remember correctly from my Economics 100 studies, any business that seeks to maximize needs to have marginal cost = marginal revenue. So betting this hand (MC) because of +EV would make a lot of sense in terms of the extra bet gained (MR), correct?

Lawrence

[/ QUOTE ]

In a vaccuum, yes.

What I'm getting it is that good poker players don't just blindly bet the river with marginal hands because that's what the simple rule tells them to do. They evaluate whether their opponent is tight or loose, the texture of the board, whether there are other opponents in the hand, their own table image, etc. and then decide whether this is a time to follow "the rule" or whether this is a time to deviate.

Blindly following the rule = +EV
Knowing when NOT to follow the rule = ++EV

[/ QUOTE ]

Knowing when to fold - $10
Knowing when to bet - $160
Knowing the difference between the two - Priceless