The other day I was thinking about Milton Friedman's old critiscism of praxeology: "So far as von Mises is concerned, I refer to his methodological doctrine of praxeology. That's a fancy word and it may seem highly irrelevant to my topic, but it isn't at all. Because his fundamental idea was that we knew things about "human action" (the title of his famous book) because we are human beings. As a result, he argued, we have absolutely certain knowledge of motivations of human action and he maintained that we can derive substantive conclusions from that basic knowledge. Facts, statistical or other evidence cannot, he argued, be used to test those conclusions, but only to illustrate a theory. They cannot be used to contradict a theory, because we are not generalizing from observed evidence, but from innate knowledge of human motives and behavior. That philosophy converts an asserted body of substantive conclusions into a religion. They do not constitute a set of scientific propositions that you can argue about in terms of empirical evidence. Suppose two people who share von Mises' praxeological view come to contradictory conclusions about anything. How can they reconcile their difference? The only way they can do so is by a purely logical argument. One has to say to the other, "You made a mistake in reasoning." And the other has to say, "No you made a mistake in reasoning." Suppose neither believes he has made a mistake in reasoning. There's only one thing left to do: fight. Karl Popper — another Austrian like Mises and Hayek — takes a different approach. If we disagree, we can say to one another, "You tell me what fact, if they were observed, you would regard as sufficient to contradict your view. And vice versa. Then we can go out and see which, if either, conclusion the evidence contradicts. The virtue of this modern scientific approach, as proposed by Popper, is that it provides way in which, at least in principle, we can resolve disagreements without a conflict." I think Friedman was mistaken on this, but not because of the reasons the Austrians think, they are probably wrong too. The issue is that its extremely difficult to apply the 'scientific method' to markets, economies, etc. Those are 'extremistan' domains, the 'evidence' is not much evidence of anything. Most people fall in love with statistics, studies, numbers, etc. It seems to be a form on anchoring and overconfidence biases. But if you rank the level of empirical proof all the way from double blind trials with large sample sizes, to observational studies without controls, regressions, etc. You will quickly see that what constitutes 'evidence' in financial markets, its at the very bottom in terms of quality in the empirical world. Furthermore, you have the issue of sample sizes. As a simple example, just to know with a high degree of confidence the standard deviation of stock prices, you need 10^13 samples in the data set (thats 10 trillion. That acc to Taleb). A lot of studies are shredded to pieces as you add more data (particularly if there arent enough outliers in the original sample) or if you test it in more countries. This is not to say that one cant look at numbers to form beliefs, you can, my point is the degree of belief (the confidence) that you attach to the idea that you understand the real world should not be high if its coming from those studies, statistics and indicators. Simply because they are not empirical enough to form high conviction beliefs, they help a little but only a little. That is the mistake of the monetarists, they attach too much confidence to these numbers and studies, when they dont deserve as much. The mistake of the Austrians is similar, but their issue is that they simply attach too much confidence to their own logic, even if it contradicts the data. A flexible mind would at least slow down when faced with contradictionary data. This is not to say that its always a mistake to do that but the problem is that the world is complex and full of surprises, to have an understanding and a domagtic view of the world based on such logic, its very likely to lead to problems due overconfidence bias or just flat out being wrong. The solution to this issue is what great market practioneers like George Soros have figured out a long-time ago. He says that markets arent like hard sciences like physics but more like Alchemy (in other words, there is an art component to markets). You cant certain about things and be dogmatic about it, but rather to be constantly testing hypothesis and have the markets reject them or accept them. Mental flexibility seems to be a key part of that approach. That mental flexibility is very much connected to the idea of uncertainty about what is true/right, which is pretty much the opposite of how dogmatic autrians behave when they think they got it all figured out or when monetarists do the same based on the `evidence`. The issue is that these Soros mindsets installs on the trader/investor a sense of not knowing what is going on which doesnt help when great trades are found and a big position might be appropriate. How to have a big position when you are not truly certain you are correct? This only increases my level of admiration to the achievements of Soros (and Druck after him), he was able to retain his highly flexible mindset but at the same time, to have the courage to put big positions despite all of that. The results was a 30% CAGR for quite some time, it was truly a remarkable achievement
Love your post. BUT!!! There are 2-3 flaws that kill it. The biggest of these is that you have created a false distinction between Popper's reliance on empirical evidence to arbitrate truth from fiction (or, what Uncle Milty called, The As-If Principle), and Soros' 'flexible mindset'. There be no difference. "Here's what I think." (Plunk! goes the box of theory/evidence...) "Here's what I've got." (Opens box and starts taking out folders....) Both a Popper and a Soros have a box. And both subscribe to a weight of the evidence dictum. A Popper who's not Sorosian Flexible is a priest. A Soros who claims to not have a box in-hand needs to go sit under a tree (like Siddhartha) until he/she's got their shit together. Alright, well, there's my vote...... (Thanks again!)
Maybe I wasn't clear enough (I was rambling after all) or I dont understand what you are saying. I dont mean to say that evidence for something shouldn't be counted as evidence or that Soros subscribes to that belief. Just that people usually overrate evidence (except Austrians who underweight it way too much) whereas people like Soros tend to be more in the middle and get it right more often because of that. As mentioned, studies/numbers/data help a little to understand the markets but i believe its important to not take that too far (like folks such as John Hussman tend to do)
Let me try to understand this: Von Mises: „I know things about the way humans act because I am human myself, and from those actions I can deduct universal conclusions about human nature. Empirical evidence cannot falsify those conclusions.“ Popper: „A theory that is not falsifiable is not a scientific theory“. Daal: „There is not enough and not good enough data to falsify any theory about the economy and markets. Hence, any theory about the economy and markets is not falsifiable.“ Is that correct?
You got my quote wrong, I'm arguing that there is not enough data to attach a high conviction level to most theories about economies and markets because they are EASILY fasifiliable/contradicted by even more data and studies. Which is typical when you are dealing with extremistan datasets At the same time, attaching no value to those studies/data is likely to be wrong as well as they can be a signal for something and under certain conditions can help on figure out the world. I didnt use the word 'any' because my post wasnt about generalizations and extremes but rather about balance and open mindness. I also believe there is a role for someone to be guided by pure logic despite what the empirical data says. It all sounds like a contradiction because that's where the art comes in and thats where Soros was great at. Its figuring out that art, when to asign more weight to the evidence, when to go with the logic, etc etc. That balance is very hard to attain, even more so, its to have the guts to put huge bets when you have such view of the world
Didn't think this would need to be said on a trading forum but Economics is not Trading ... Trading is not Economics.
Three cheers for this post. One of the most insightful ever posted on ET. I doubt that many will benefit and understand, but thank you nevertheless. A rare contribution indeed! I started to make what I can describe as consistent, well above average returns from the market after I read and studied Hayek, Keynes, and in particular, Soros. Soros is a true genius of our time and among our most public intellectuals. He has generously shared his insight with those who are receptive, but few appreciate what he has freely given.. We expect a gift to be something received without effort on the part of the receiver. Soros's gift, however, though freely given, can't be appreciated without effort. That makes it rather unusual.
von Mises: "Lugwig von Mises rejected the use of mathematics in economics, but by no means abandoned abstract theorizing. In fact, Mises's methodology is quite unreal. Mises's books contain no charts, tables or graphs...They contain no mathematical formulas or econometric models, no empirical proofs" - Vienna & Chicago, Friends or Foes?: A Tale of Two Schools of Free-Market Economics Lets call this the Theory over Math approach Friedman "The ultimate goal of a positive science is the development of a theory or hypothesis that yields valid and meaningful (i.e., not truistic) predictions about phenomena not yet observed" "The relevant question to ask about the assumptions of a theory is not whether they are descriptively realistic, for they never are, but whether they are sufficiently good approximation for the purpose in hand. And this question can be answered only by seeing whether the theory works, which means whether it yields sufficiently accurate predictions." https://mises.org/library/forecasting-model-solution Lets call this the Data over Theory approach One of the great advantages of both of those approaches is that they give the person confidence. If a trader is completely convinced that the Austrian school is correct, they might feel embolded to take some big bets based on that understanding. Similarly, if someone is convinced that the data/evidence/math/statistics demonstrates something very deeply, they might feel embolded to take some pretty big positions in the markets given that the person will 'know' that they are right. "I'm just following the scientific method" they might even think even if that is completely ridiculous. This seems to be what the LTCM folks did, they had a huge bet book mostly because they derived a lot of confidence in their models. What seems freaky about Soros is that he didn't seem to be on either of those extremes. That is, he didnt derived his confidence from a view of the world that would GIVE him that confidence, he didnt "cheat" like that. Just the opposite, his view of the world was one where things can be falsified at any moment (which he got from Popper). One of his traders described him as a low battling average baseball player, Colm Oshea says he was very quick to let a position go, that he just didnt care. He also sounded humble about his beliefs in this book The Alchemy of Finance. Yet, despite all that he would still be able to have a lot of confidence to put big bets when the time had come to do so, without "cheating" and using tricks like dogmatic beliefs. He had some sort of 'true' confidence that is hard to achieve. To me this is fascinating
Friedman's statement above puzzles me because it is in my nature to question how it is that an assumption that is not descriptively realistic can be a sufficiently good approximation to give rise to a useful theory other than by chance and good luck. Were I an economist, I would be profoundly concerned if my assumptions proved to be descriptively unrealistic. This is by no means the only utterance from the great Milton that left me scratching my head. My guess is that he originally made the above remark in response to criticism of one of his 'descriptively unrealistic' assumptions.
Think of it as just dipping your toe in the (explanatory) waters. You don't have to explain *everything* -- just enough to shed light on the little corner in front of you. Like Einstein's Special Relativity -- leave the Big Deal (The Theory Of General Relativity) for later: let's just specify this sliver well enough. Enough slivers, and you've got yourself a meal. (!!!) That's the As-If Principle.