McKinsey agrees...

Here is the latest article from McKinsey Quarterly, the summary is Power Law works in the Economic field and the implications for policy choices are very serious to ignore. Just what Dr.Taleb, Mandelbrot and others have been saying for decades. Listen to the video below where Mandelbrot explains his theory... fascinating stuff!

A new way to look at economics

I am quoting from an article written in FT by Beneoit Mandelbrot and Nassim Nicholas Taleb...

" The traditional Gaussian way of looking at the world begins by focusing on the ordinary, and then deals with exceptions or so-called outliers as ancillaries. But there is also a second way, which takes the exceptional as a starting point and deals with the ordinary in a subordinate manner – simply because that “ordinary” is less consequential."

I think this paragraph has convinced me that we need to throw the old ways of looking at the problem and start with a new perspective. With that said, I am seriously thinking about pursuing my PhD in Economics. Maybe, the title of my thesis would be "What they don't teach you in Economics and Econometrics".

Randomness

I have finished listening to Nassim Nicholas Taleb's book The Black Swan. My understanding on using the Gaussian method to describe social sciences like economics has been altered forever. Believe me I spent quite a lot of time in Graduate School learning and reading about the beauty of "the bell curve" to describe random variables. Although it was elegant, pure and tight in describing some systems I feel I should have been more skeptical of its inference capabilities. I also think my professors should have spent more time describing situations where it does not work which is any random variable that is derived through aggregation for example total stock returns from a portfolio of stocks, wealth, stock prices, interest rates, currencies exchange rates, i.e. all macroeconomic indicators. When I think about this I am not sure if the above variables are random at all, as they all have some form of dependency.