Home > Uncategorized > The Volatility Index and Heisenberg’s uncertainty principle

The Volatility Index and Heisenberg’s uncertainty principle

from Donald MacKenzie and the London Review of Books

The VIX, or Volatility Index, is Wall Street’s fear gauge. I first started paying attention to it in the late 1990s. Back then, a level of around 20 seemed normal. If the index got to 30, that was an indication of serious market unease; over 40 signalled a crisis. The highest the VIX ever got was during the 1987 stockmarket crash, when it reached 150. In the 2008 global banking crisis, it peaked at just below 90.

The US economy has gradually recovered from the banking crisis, and the newly legislated tax cuts will further boost corporate profitability. These effects, though, are now ‘priced in’: share prices have already risen to reflect them. Tax cuts aside, the political system remains largely paralysed. The Federal Reserve seems likely to continue raising interest rates, which usually isn’t good news for the price of shares, and is beginning the process of weaning markets off the flood of cheap money that has helped inflate share prices. The tax cuts will most likely increase the Federal deficit. Add in a president who is the very opposite of calm (and who is under FBI investigation), and you might expect the VIX to be approaching the sweaty-palmed 30s. It isn’t. As this issue of the LRB went to press, the VIX was 9.8. It has been low for many months, and shows no clear sign of increasing.

Donald Trump would no doubt attribute the low readings to investors’ confidence in his leadership. But I have my doubts. There is an alternative explanation. Heisenberg’s uncertainty principle is often taken to mean that whenever you measure something, you alter it. In the everyday world, you can usually set this aside: I don’t worry about the effect of the speedometer on how fast my car’s wheels turn or on how its engine runs. You can’t ignore it, though, in economic life. As Charles Goodhart argues, if a measurement device is widely used, it stops being a simple economic speedometer. In the financial markets, it becomes part of how traders think, and can then begin to affect how they act.

Read more here in the LRB

  1. Risk Analyst
    January 18, 2018 at 7:23 pm

    This is kind of a frustrating article from a couple of standpoints. First along the lines of the “What’s the matter with America?” discussion it is dumbfounding that someone can’t even write an article on the VIX index without throwing in politics. There is no defensible reason why a reader in finance should have to endure a writer’s political views any more than it would be appropriate for him or her to first tell us their preferences for Mexican food over Chinese. This is just so boorish.

    Second, he brings up an interesting topic but then drops it, and given my nasty mood now about the author I am assuming he drops it due to educational inability to pursue it. He brought up the idea of whether the VIX being used as a standalone investment in ETFs and other investments available to non-institutional investors would impact its value. Well, look into it and tell us. If investors are putting money into the VIX ETF, and the ETF portfolio managers then have to buy VIX futures, which in turn impact triangular arbitrage relations between puts, calls, and futures and so impact the price of the puts and calls, then good. See if the dollar flows are large enough to actually have an impact, and if so then you actually have a story worth reading. But why just bring up the subject, take a couple of cheap shots at whatever politician you don’t like, and then just move on and actually say nothing.

  2. January 18, 2018 at 7:37 pm

    Reflexivity. George Soros. It’s not what you think. It’s what you think they’ll think when they know what you know. Or it’s like Keynes beauty contest where you don’t pick your ideal of beauty but rather figure out what others will think beauty is. For some reason this kind of analysis crops up after debt deflations and the casino speculative markets that precede them. Which of course goes to Minsky and his ideas about Ponzi financial entities and crazy bank behavior in the end game of the cycle.

  3. Rob Reno
    January 18, 2018 at 9:05 pm

    There is truly something Freudian about your protest Risk Analyst, when can easily find numerous economists and scholars make plain indeed it is all about politics and power, lobbyists and politics, and the recent 2007-2008 Financial Crisis makes that perfectly clear. There indeed is many reasons to address politics when considering economics in all its various manifestations, for what we decide to measure and has much more to do with politics than science. Indeed, it is indefensible in light of what we know now to make such a protest verging on ad hominem just because the author openly addresses the elephant in the room. Cleary some have preferences that ignore real human realities a that have more to do with finance and economics as practiced in the real world where politics, lobbyists, and power plays a major role and impacts real lives, preferring to hide behind theory divorced from reality. Indeed, it all seems like a childish nasty mood having a tantrum.

    1.Hossein-zadeh, Ismael. Beyond Mainstream Explanations of the Financial Crisis [Parasitic finance capital]. London: Routledge; 2015; pp. 12-14.

    Notes: Faith-based diagnosis of the crisis

    We must … see neoliberalism as practiced by Greenspan and his ilk as making capitalism a religion, the market a god and economics a form of theology. (Alex Andrews, Guardian)

    The faith of some neoliberal economists in the market mechanism is so strong that they tend to deny altogether the actual incidents of failure or fraud in real markets. Thus, as economics and law professor William K. Black pointed out:

    Fraud is impossible because securities markets are ‘efficient’ and act as if the were guided by an ‘invisible hand.’ Markets cannot be efficient if there is accounting control fraud, so we know (on the basis of circular reasoning) that securities fraud cannot exist. Indeed, when mainstream economists try to explain why the security markets automatically exclude frauds their faith-based logic becomes even more humorous. (As quoted in Global Research 2012)

    When Alan Greenspan, the former head of the Federal Reserve Bank, confessed in the immediate aftermath of the 2008 market crash that his belief in the security or invulnerability of financial markets had been unwarranted, many viewed the admission for what it was: a crisis of faith–the faith that the unchecked market would always behave benevolently. It exposed what many critics had been saying for some time:

    [T]hat the character of neoliberal economics is essentially religious. This is counter-intuitive. Surely the policy of Greenspan and others is based on an understanding of the science of economics, particularly in the mainstream neoclassical form that is most often taught in universities around the world. It is certainly the case that neoclassical economics appears scientific. This is because it deploys huge quantities of complex mathematics, giving it the veneer of being what it has long hoped to be, a kind of social physics. (Andrews 2009)

    The less-than salutary theoretical foundations of mainstream economics is often embellished with a scientific facade of elaborate mathematics and elegant but highly abstract models. Arguing that “modern economics is sick,” the renowned economics professor Mark Blaug writes:

    Modern economics is sick. Economics has increasingly become an intellectual game played for its own sake and not for its practical consequences. Economists have gradually converted the subject into a sort of social mathematics in which analytical rigor as understood on math departments and practical relevance (as understood in physics departments) is nothing. If a topic cannot be tackled by formal modeling, it is simply consigned to the intellectual underworld. To pick up a copy of American Economic Review or Economic Journal, not to mention Econometrica or Review of Economic Studies, these days is to wonder whether one has landed on a strange planet in which tedium is the deliberate objective of professional publication. Economics was condemned a century ago as “the dismal science,” but the dismal science of yesterday was lot less dismal than the soporific scholasticism of today. To paraphrase the title of a popular British musical: “No Reality, Please. We’re Economists.” (2002)

    It would not be far-fetched analogy to argue that mainstream economists’ explanation of periodic financial implosions (and of economic crises in general) by factors “external” to capitalist systems tends to border on superstition. (Hossein-zadeh 2015, 12-14)

    • Rob Reno
      January 18, 2018 at 9:07 pm

      Politics is not “external” to economics (or finance) in the _real_ world.

  4. Rob Reno
    January 18, 2018 at 9:25 pm

    There is no shortage of economists, professors of social and political economy, etc. who make clear; politics is not external and is at the core of economics, including finance. We will no longer let the Econocracy mislead our children into believing such nonsense as economics and finance are somehow separate from politics and culture. We do so our children’s and grandchildren’s expense.

    Reference List

    1. Hudson, Michael. Finance as Warfare. UK: College Publications for World Economics Association; 2015; p. 1. (World Economics Association Book Series; v. 2).
    Notes: To simple people it is indubitable that the nearest cause of the enslavement of one class of men by another is money. They know that it is possible to cause more trouble with a rouble than with a club; it is only political economey that does not want to know it. ~ Leo Tolstoy, What Shall We Do Then? (1886)

    The financial sector has the same objective as military conquest: to gain control of land and basic infrastructure, and to collect tribute. To update von Clausewitz, finance has become war by other means. It is not necessary to conquer a country or even to own its land, natural resources and infrastructure, if its economic surplus can be taken financially. What formally took blood and arms is now obtained by debt leveraged. (Hudson 2015, 1)

    2. Sayer, Andrew. Why We Can’t Afford The Rich. Policy Press: University of Bristol; 2015; p. 270.
    Notes:

    In the US, Michael Hudson comments,

    Predatory finance has concentrated wealth and used it to buy control of governments and their regulatory agencies. It even has taken over the Justice Department and the courts, so that financial fraud in America has been decriminalzed. Bank lobbyists back the campaigns of politicians committed to deregulating banking of and its major clients (real estate, natural resources and monopolies). So there is no regulation of outright criminal behavior even by the largest banks such as Citicorp and Bank of America where fraud was concentrated.

    3. Sayer, Andrew. Why We Can’t Afford The Rich. Policy Press: University of Bristol; 2015; p. 270.

    Notes: When plunder becomes a way of life for a group of men living in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it. (Frederic Bastiat, French writer and economist)[84]

    It is not wisdom, but Authority that makes the law. (Thomas Hobbes)[85]

    In academia, economists, at least mainstream ones, provided justifications for deregulation by reference to the theory of ‘efficient markets’, a bizarre theory based on if-pigs-could-fly assumptions in which financial markets correctly assess all relevant information, correctly estimate risk and allocate resources, provided the state does not interfere.[90] Some of their theories were put into practice in the construction of financial markets [see Llyod Blankfein and ‘market makers’ comment to congress: https://www.youtube.com/watch?v=66Z_1c-kLFM%5D, so, rather than being external academic observers, some economists were part of the game and making money for major financial businesses. In the US, certain leading mainstream economists, as true believers, traded on the symbolic capital of their academic credentials and moved between university posts, jobs with major financial institutions and positions as regulators and government advisors — Alan Greenspan, Glenn Hubbard, Larry Summers, Fredric Mishkin and Laura Tyson. The revolving doors were spinning. No wonder mainstream economists have been mouse-like in their criticism of the financial system, as they had been important players in it. As Phil Mirowski has shown, they had too much investment — financial as well as intellectual — in the system to repudiate it; blunting the critical knives was a way of protecting their own discipline.[91] But then, it is hardly surprising that the growth of business schools in universities and the shift of economics departments into them — itself one of the most obvious indications of the infection of universities by neoliberalism — would push them into the embrace of business. And why should economists who believe in the primacy and universality of self-interest let truth get in the way of pursuing it?[92]

    [84] From http://www.nakedcapitalism.com/2012/10/john-kenneth-galbraith-on-the-moral-justifications-for-wealth-and-inequality/.
    [85] Hobbes, T. (2005) [1666] A dialogue between a philosopher and student of the common laws of England, Oxford: Oxford University Press.
    [90] As Gillian Tett and other close observers of the financial sector have observed, the efficient markets thesis — routinely used to legitimise the financialisation of everything — has become a kind of religion: ‘There is a real sense of intellectual confusion. Over the past year I have been talking to former true believers and they’re like a priest who has lost faith in the Bible, but still has to go to church, and the congregation is sitting there but he doesn’t know what the Bible is any more …’ Adair Turner adds: ‘Yes, the fact is that intellectual systems — the whole efficient market theory, Washington consensus, free market regulation system — can become like a religion’: Turner, A. (2009) ‘How to tame global finance’ Prospect, 27 August, http://www.prospectmagazine.co.uk/magazine/how-to-tame-global-finance/.
    [91] Mirowski, P. (2013), Never let a serious crisis go to waste, London: Verso. It has been heterodox economists, largely excluded from major economic journals, who have blown the whistle on economists acting on behalf of companies.
    [92] It’s worth asking economists who profess this whether they believe it because they think it’s true or because it’s in their self-interest to believe it. If the former, then acting on the basis of what is true is an exception, and if the latter, then why should we take their ideas seriously as an account of human motivation?

  5. Risk Analyst
    January 18, 2018 at 10:39 pm

    I don’t think it is an elephant in the room issue. That analogy is about something not discussed that has to be, while my point is just like a gangland member flashing his crips or bloods hand sign, it seems to be necessary to show one’s membership before communicating. I fundamentally could not care less about MacKenzie’s politics and it has nothing to do with the conclusions. Turn it around to see how ridiculous this is. MacKenzie is British based, so if I were to write an article on Libor being replaced by OIS rates, would it be appropriate for me to mention that Theresa May’s stance on the Calais immigrant situation is racist somewhere in the paragraphs about the manipulation of Libor? No, it would not.

    Anyway, in your reference to Mishkin, you really hit the nail on the head. In Greenspan’s biography, he is clearly upset that in the middle of the financial crisis, Mishkin who is on the Board as a markets expert, is frequently missing and on vacation skiing in Europe and such. And when needed the most, he resigns the Board membership because he correctly senses the demand for an updated version of his finance textbook (currently selling at $283) will make him huge amounts of money. He seems to believe in the reverse of what President Kennedy said, ask not what you can do for your country, but what your country can do for you.

    • Risk Analyst
      January 18, 2018 at 11:17 pm

      Oops, I meant Bernanke’s biography.

    • Rob Reno
      January 19, 2018 at 5:09 pm

      You have a lot of insight aimed at the personal motives of Mishkin. Do you sleep under his bed? Ad hominem is childish and degrading of any content that might actual be of vale in your communications. I suggest you stop hiding under the bed and using ad hominem, it makes you look very silly.

    • Risk Analyst
      January 19, 2018 at 5:59 pm

      Please explain how my stance is ad hominem when it comes straight out of Bernanke’s book. I said it was out of his book, I paraphrased it, and now I’ll quote it:

      From Bernanke’s The Courage to Act:

      “Board member Rick Mishkin, who had missed the FOMC’s emergency call on Martin Luther King Jr. Day while cross-country skiing, was skiing in Finland and had missed this vote, too.” (p. 209)

      “I was also worried we would lose Rick Mishkin…..while serving at the Fed, work on a new edition of his very well-regarded (and lucrative) textbook on money and banking. The answer from the Office of Government Ethics was no. (p. 171-172)

      In addition I will pass on some additional information, and again provide the source so I am not accused of ad hominem, the movie “Inside Job” about the financial crisis is extremely negative on him suggesting he reached expert conclusions on the stability of Iceland because of being paid, and not because of the facts:

  6. Rob Reno
    January 18, 2018 at 10:50 pm

    [E]conomics has been molded typically to benefit the wealthy and the interests of the elite of the United States. Just as with the US political system, economics has been captured by the powerful and they are not in the mood for fairness. They are not even in the mood for discussion: you will not find academic articles about fairness in the top economic journals. Only through having been caught so blatantly with their noses in the troughs (e.g., the 2011 Academy Award-winning documentary Inside Job) has the American Economic Association finally been forced to adopt an ethical code, and that code is weak and incomplete compared with other disciplines. Increasingly, and especially during the past ten years, there is evidence that the US is beginning to doctor the numbers for measures such as productivity and GDP to make itself look stronger and more powerful than it actually is. In this it is copying its forebear the British Empire, which increasingly began to tell itself lies as it failed to arrest its relative economic decline after the recession of 1873-79, until the Second World War bankrupted and broke up its global hegemony. Economics is supposed to be about revealing truth such that society learns to become better than it was before…. It is not supposed to be another tool for the powerful to enrich themselves at the expense of others. (Häring & Nial 2012, ix)

    Economic elites can capture the government and use government power to their benefit. Powerful politicians can use their office to acquire economic power…. An economic model of the political process starting from more realistic assumptions is more constructive and optimistic. It allows the conclusion that governments will do what is in the interest of the citizenry if voters are well informed and there is a culture of political participation. Equally, if voters are deliberately misinformed and political participation means choosing from a carefully controlled, narrow range of options preselected by the ruling elite, it is hard to see how any political process can have the citizenry’s best interests in mind. Häring & Nial 2012, xii-xiii)
    History Never Ends

    The interplay of economic and political power is complex and cannot possibly be understood within the ahistorical equilibrium analysis of mainstream economics. History teaches that the same event or innovation can have very different consequences, depending on the specific social, economic and political system of a specific time and place. Daron Acemoglu and Simon Johnson from MIT and James Robinson from Harvard are foremost among a new breed of economists who have rediscovered history, power and elites. In a series of influential articles, they have demonstrated that a lot depends on who had power to set the rules of the economic game at important crossroads in history. Their approach can explain why economies developed along very different paths, even when they started with comparable economic conditions and opportunities. (Häring & Nial 2012, 208)

    Economics is a fascinating field that we feel has been stunted by those who have misdirected it for other purposes. As the challenges of increasing basic resource scarcity grow ever greater as we progress into the twenty-first century, economics will have to mature as a field. Instead of hiding its biases behind the façade of a pseudoscience, it will need to become a social science in the best sense of the word if our civilization is to survive. It will need to be for more rigorous about how much is science (objective, mathematical modeling of truth), and how much is political economy and even moral philosophy dressed up as mathematical economics. This means being up-front about being political, about whose and which interests are served. Only people, like you, can demand that the discipline of economics demonstrate the rigor it claims for itself. (Häring & Nial 2012, Afterword)

    — Häring, Norbert and Douglas Nial. Economists and the Powerful [Convenient Theories, Distorted Facts, Ample Rewards]. New York : Anthem Press; 2012.

    I choose carefully which economics books I give to my children (as required reading) because I know as graduate students their reading time is limited. Becoming a neuroscientist, neuroscience researcher, and medical doctor is a demanding undertaking which leaves little time for studies outside one’s chosen field. But I have raised them to realize that it is important that they not leave some things to the experts – the Econocracy – but Harring & Nial are one of those few that are important for their future and the future of their grandchildren.

    History matters, as does political philosophy, political science, and the undeniable interplay between power, politics and economics throughout history.

  7. Edward Ross
    January 19, 2018 at 9:22 pm

    Rob Reno congratulations for your stand that economic conversations cannot logically be separated from politics and the social sciences including modern anthropology because politicians do the bidding of their elite wealthy masters that are supported by one eyed economists.

    • Rob Reno
      January 20, 2018 at 4:58 am

      Thanks Edward. Just to be clear, I didn’t pull the term ‘Econocracy’ out of thin air (or anywhere else ;-) It comes from the title of a book:

      The Econocracy: The Perils of Leaving Economics to the Experts (Manchester Capitalism MUP)
      by Joe Earle et al.
      Link: http://a.co/8QCaqP0

      Another important text to have handy when one is being fed one-eyed economic claptrap is:

      The Economics Anti-Textbook: A Critical Thinker’s Guide to Microeconomics
      by Rod Hill et al.
      Link: http://a.co/cwA87ZV

  8. January 20, 2018 at 3:54 pm

    Thanks to the editor for calling this article to our attention. It is the necessary complement to the Robert Shiller’s CAPE Index which the co-author told us in the Fall of 2017 was at one of the highest levels in its history, a strong cautionary note: https://www.project-syndicate.org/commentary/us-stock-volatility-bear-market-by-robert-j–shiller-2017-09

    I’m sorry Risk Analyst, you asserted overt politics by Donald MacKenzie, but didn’t explain why. Is a dose of realism, pessimism, historical reminders about Alpine Climbing price shares ruled out by some type of inherent free market optimism?

    I hate to add to the complexity level of economics, but in terms of deep ideology, have psychological states – optimism vs pessimism – become ideological in themselves, as the Republican Right liked to throw against the Democrats (left and center), Reagan vs Carter…?

  9. Rob
    January 21, 2018 at 1:02 am

    “This is kind of a frustrating article … is dumbfounding that someone can’t even write an article on the VIX index without throwing in politics…. “[H]e brings up an interesting topic but then drops it, and given my nasty mood now about the author I am assuming he drops it due to educational inability to pursue it.”
    You don’t like is argument so you attack his person and respond childishly and emotionally (we have all done it). It is ludicrous to assert that politics have nothing to do with economics or how certain economic metrics are used. One has to be historically blind to make such an assertion, which is essentially what you are making by claiming it is “dumfounding” for someone to bring politics into discussion of the metric of risk as purportedly found in the VIX index. When Wall Street creates a new casino betting mechanism (i.e., turning VIX into something you actually trade) to get rich, which is what the author is addressing, the actual role of the metric becomes increasingly uncertain. The idea that any economic metric is immune from such influences is naïve at best, and ideologically driven at worst. Consider the ratings agencies role in giving toxic debt AAA ratings and the underlying conflict of interest in that they were being paid by the very investment banks creating these toxic debt instruments. Indeed, the uncertainty principle holds. And all this market manipulation and deception is due to political actors lobbying for deregulation, using money and power to bring about regulatory capture by Wall Street of government regulators. What was once supposed to be a metric used to caution or warn can easily be used in ways opposed to its explicit purpose. It is common sense that when the Feds turn a mobster to snitch on the boss that they are dealing with a less than consistent witness, but that doesn’t make his witness to murder any less true. The same can be said for many of the Wall Street mobsters who helped create the 2007-2008 Great Recession and are now signing a different tune. If the statement is true and collaborated by many different sources it is true regardless of the less than stellar moral character of the witness. And that is simply common sense.

    Even the choice of using GDP to measure economic success is political.

    Reference List

    1. Häring, Norbert and Douglas Nial. Economists and the Powerful [Convenient Theories, Distorted Facts, Ample Rewards]. New York : Anthem Press; 2012; pp. 28-29.

    Notes: The power to choose the measure of success

    The successful campaign to eliminate distributional issues from the core of the economic discipline has its mirror image in the popularity of GDP as the measure of economic success of a nation. While the pioneer of national accounting (i.e., GDP), Simon Kusnetz, explicitly said that GDP should not be used as a measure of welfare, and few economists would explicitly advocate such use, it is also true that economists as a group have done precious little to counter the popular opinion that growth, in the sense of maximization of GDP, should be the main goal of economic policy.

    GDP is the money value of final goods and services that an economy produces in a quarter or a year (i.e., not including those goods and services used as inputs in production of other goods and services). This definition makes it is a [sic] reasonable yardstick of how much money moved around in a quarter or a year, and therefore captures to some extent how much economic activity in money terms there was in that period. (Häring et. al. 2012, 28)

    It is a poor measure of actual activity in absolute terms due to using money rather than physically measuring human activity or indicators of human activity (e.g., how many tons of material were moving around in a year, or how many bits of information were exchanged in a year). Some activity that commands a large premium in money terms for institutional reasons, like investment banking, even if it is only one powerful person doing a moderate amount of work, will count the same as activities of hundreds of factory workers and much more than the activity of millions of housewives. Societal changes like providing more institutional childcare or reigning in the market power of investment banks can make a huge difference in terms of measured GDP, without significantly changing the actual activities performed. Because of this reliance on using money valuations, GDP has severe issues with accurately measuring technological progress. (Häring et. al. 2012, 29)

    This method of measuring economic activity has two things going for it. It makes the mathematics a lot easier than measuring in a sensible way. And it conforms with the implicit assumptions if mainstream economics that an extra dollar is worth the same to a poor person than it is to a rich person, just as it makes no differentiation between types of activity, for instance whether they are good (i.e., charitable work) or bad (i.e. criminal activity). If a hedge fund manager makes five billion dollars in a good year, as John Paulson reportedly did in 2010 (Burton and Kishan 2011), this is must as good in GDP terms as 13.7 million people living on a dollar a day doubling their incomes. (Häring et. al. 2012, 29)

    Policies that treat human beings as social creatures and try to reach the best results in the most important dimensions of human goals cannot flag their success with equally prominent and simple statistical measures like a single number where higher is “better.” The rich and wealthy benefit most from this way of measuring the economic success of a nation, since it de-emphasizes the gains of the mass low-income people relative to those of a minority if rich people. As far as nations are concerned, it benefits nations that champion the policies favored by this approach, with the US being foremost among these. (Häring et. al. 2012, 29)

    • Rob
      January 21, 2018 at 1:05 am

      I so wish this site had an edit button.

    • Risk Analyst
      January 23, 2018 at 12:27 am

      Sorry Rob but I’m not sorry. I thought about this. First, this is my profession and not yours or his. I’ve worked at the Fed (which is why I am so hard on Mishkin), and as a trading floor economist, portfolio manager and done financial engineering. The author I complained about is a sociology professor trying to make statements about pricing the VIX index. I said two things, first just pointing out an obvious path to see what was going on with the VIX. Why muse about it, just answer the question if he is in the industry. I pointed out a path for him. No one else except Peter added anything at all to the subject. Nothing. Just crickets. Since I have a history of actually doing financial engineering and pricing, I have every right to question a paper about financial engineering and pricing.

      Second, I severely criticized him for his politics. It is not normal to thrust politics into everything. Again, I will repeat that is not normal. This is a piece about the pricing of the VIX. Mentioning Trump’s ego, and that he is being investigated by the FBI, and that he “is not calm” has nothing to do with pricing VIX. The author did not mention political unrest as adding to price variability, he went directly to characterize a politician and leave no doubt as to what he thinks of Trump. Again, those gratuitous remarks and very purposeful politicalization of everything has no place in pricing the VIX. If one wants to price a derivative, it does not matter what political party they belong to. And instead of shouting me down, maybe you might want to ask why I have these opinions. Notice that other people have their own life experiences which may be different than yours.

      And, to that last point, I probably will cut way back, perhaps to zero on my posts here. It’s been interesting but too many of these discussions are just me-too echo chambers and the last thing acceptable is contrary opinions. There was a lot more variation in viewpoints a year ago and it seems diversity has been driven out. The last issue for me is the censorship now added to my ID where my comments are being “moderated.” I called someone boorish and end up being censored, whereas during the last presidential campaign someone (who still posts here) questioned if I were a Nazi. I hate hypocrisy. I am questioned about being a Nazi and that is acceptable to the site owners, but it is not OK for me to call someone boorish. Again, this hypocrisy is a bit too much for me and I may stop posting entirely.

      • Rob Reno
        January 23, 2018 at 2:16 pm

        Prior to the 2007-2008 financial collapse caused by the financial engineering of MBS and their derivatives (aka toxic debt instruments) the emperor could parade around and pretend he was clothed pontificating financial “science” when in reality they were orchestrating a massive Ponzi scheme based upon rank greed and pseudoscience that turned the global financial system into a gambling casino for the elite superrich traders, hedge fund managers, big banks, and amoral ‘quants’ doing the ‘financial engineering.’ To call this “engineering” is disgrace to real engineers who build something of _real lasting value_; more like theft by other means, such as mathematical engineering of Ponzi schemes and casino-takes-all gambling with other people’s financial wellbeing. Post 2007-2008 Financial Crisis the emperor has no cloths and stands naked with their private greed hanging out for everyone to see. And it is political to the core that allows, justifies, and makes sure such parasitic finance remains unregulated to pursue its own objectives. I am not sorry either, for you see, my children’s and grandchildren’s future depends on seeing the naked emperor for what he really is all about; unmitigated greed pretending to be entrepreneurial innovation.

      • Rob Reno
        January 23, 2018 at 2:29 pm

        I would never call you a Nazi, and am sorry if that happened. But each is entitled to their views, even if we stand diametrically opposed. You seem to be blind to the harm done by so-called ‘financial engineering’. If you had wanted to explain what you do, you could well do so without the ad hominem and arrogance that dismisses the litany of financial experts saying plainly — and more bluntly even — what I say above. But you chose not to. That is your choice. I for one cannot stand by and say nothing while finance is used, as the title to one WEA book reads (Finance as Warfare), an instrument of class warfare.

      • Rob Reno
        January 23, 2018 at 3:25 pm

        I find your inability to link Trump’s behavior and its impact on US and global “political unrest” odd to say the least. You also ignore the fact that turning the VIX index into “something you could actually trade” and the resulting feedback loop have potential unforeseen consequences, such as altering how it is used and viewed by those turning it into another money making scheme. In my view, these kinds of financial shenanigans don’t deserve the name “engineering” and it will be by the action of political will of the American people that this kind of gambling casino finance will eventually be reigned in.

      • Risk Analyst
        January 23, 2018 at 8:46 pm

        Rob: Financial engineering is a set of tools (stochastic calculus, monte carlo simulations, trees,…) for pricing things. Those tools do not know what your politics are. You said you own a house, so when you or the bank calculated the mortgage payment, that is financial engineering. It is that simple. Were you evil to figure out your mortgage payment? I do not want to minimize the damage done by some very bad people, but you are blaming the tools or a small group of people, when the financial crisis was a bigger problem. Look to Minsky’s work on how stability is destabilizing, where the last financial crisis was the result of weaknesses in the economic system. Trying to blame a handful of [insert whatever swear word you want here] financial engineers completely misses the point of economics as a system. The study of economic business cycles is far far far more interesting than some simple easy answer blaming a small group of overpaid heartless number crunchers who simply telescoped and magnified existing fatal flaws in capitalism.

        And on the VIX. I do not follow it so am not sure how it behaves. My point is that the author should just simply show any possible chain of causality of how higher visibility could impact its value. You tell me that I am ignoring that causality. Have you looked into it? Why do you assume there is causality? Whether one person or one million people bet on the lottery, the numbers chosen are not impacted. Is the VIX an after the fact residual calculation of the standard deviation of the S&P500 and therefore has no feedback to securities prices? I have not looked into it and have no idea. You are telling me I am ignoring a causality that neither of us has a clue about.

      • Rob Reno
        January 24, 2018 at 1:11 am

        Thank you Risk Analyst. I’m familiar with the tools you speak about as these algorithms are part and parcel with my field of expertise (monte carlo simulations, trees, and many more). Let me be clear. I don’t think all of finance is bad, including risk management. I do take your point to heart that the causes of financial crisis was not reducible to tools which used as intended serve a useful purpose. It was not my intent to imply such; comments are a poo way of discussing such complexities. I know it is more complex than that, really, honestly, I do ;-) There are some wonderful resources emerging in the scholarship that shed light on these complex but understandable nexus of causes. My apologies if hyperbole offended. I see now that your intent is not to minimize but to understand. What more can we ask of each other, after all. All the best to you my friend, and your thoughtful response is appreciated.

      • Rob Reno
        January 24, 2018 at 1:14 am

        Oh my gosh, “poo way”!? I’m hearing Janice Joplin in my head, “Oh Lord, won’t you buy me, an edit button …” ;-)

  10. January 21, 2018 at 12:35 pm

    MacKenzie’s insights are excellent. His discussion of the details of financial trading provide are really amusing. It seems traders are so insecure and juvenile they need props to prop up their props. I wonder how these guys would ever be able to deal with actual, tangible risks of living.

    The comments are inspiring. I agree with most everything said. I just need to add a few comments. “Quantum Physics says: reality is what you believe it to be… And belief is a choice.” This is a stunning combination of William James and current anthropology/sociology. It’s applicable to this conversation because of the feedback loops that can reconstruct our ways of life. Many of which can be manipulated by politicians, judges, social scientists (including economists), the media, etc. Depending on how firm the loops are, the extent to which they can be altered, and the tools for manipulation available, with sufficient time and resources the most basic parts of culture can be altered. For the discussion here, this means it is possible for the “rich and powerful” to alter American ways of life so that the rich getting richer, and the poor thrown under the bus are accepted as “normal.’ Which is precisely what has occurred over the last 50 years. Just think for a moment of the actions, labels, and expectations that are “normal” today that would have been abnormal 50 years ago. The list is long. And it’s not difficult to accomplish. Sometimes it’s just a name change – ‘Hi! I’m Donald Trump. I’m a populist.’ Or, Sherlock Holmes, the Duke is the best horse thief in the county. Donald MacKenzie’s book “Do Economists Make Markets?” goes into detail about the role of economists in changing the normal for markets. If you want to read some scary stories about how mathematics is used to change normal, check out Cathy O’Neil’s “Weapons of Math Destruction.” The comments here identify some examples of this process, as well.

    This is my rewording of one comment. “Economics is NOT supposed to be about revealing truth such that society learns to become better than it was before…. It is not supposed to be another tool for the powerful to enrich themselves at the expense of others.” Truth implies transcendence beyond the human sphere. Beyond what humans can grasp. Economics seeks facts. Facts are not transcendent, are fully challengeable and variable, reflect human values and priorities, and are certainly embedded in human cultures. Humans use facts to better understand human cultures and societies, and sometimes improve them. But humans also use facts to wage war on one another, participate in racism and ethnic cleansing, and destroy the Earth’s atmosphere. That’s the kind of species Sapiens is. So, yes, economics can be and is often “a tool for the powerful to enrich themselves at the expense of others.” The founders of the US recognized an evolutionary truth in creating the US – factions (such as plutocrats, industrialists) who might use economics in this way must me controlled. Thus, the need for a strong central government and strong central regulatory agencies. (See Federalist Papers 9, 10, 11) Over the last 50 years both have been greatly undermined if not wholly eliminated. Replaced by “self-regulation” – a solution no self-respecting conservative would ever accept, and certainly was not accepted by those who created the US.

    Finally, on the question of economics’ usefulness, and the question of whether it ought to be allowed to continue to exist, my suggestion is simple. Being virtually useless, I suggest we end this social science. Anthropology, sociology, psychology, and political economy all study the same topics as present-day economics. Economics is literally too dangerous – for human cultures and human existence – to continue.

    • Rob
      January 21, 2018 at 4:15 pm

      “Quantum Physics says: reality is what you believe it to be… And belief is a choice.” Who are you quoting Ken?

      • January 22, 2018 at 7:39 am

        Rob, it’s from a “talk” I deliver to business leaders, BOD’s, and clients. It’s the shortest summary I could create for chapter one in Quantum Mechanics textbooks. The books generally word it something like this – reality doesn’t exist till it’s measured. I simplify that with, reality doesn’t exist till it’s interacted with. This is also the position of most anthropologists and sociologists today. And, as I said it’s a good summary of American Pragmatism created by William James and Charles Sanders Pierce. It’s sometimes difficult to communicate to western audiences steeped in realism.

      • January 22, 2018 at 10:13 pm

        Ken, you are conflating active realism with what people say it is with realistic aims: what works.

      • January 22, 2018 at 10:18 pm

        As Rob says above, “I so wish this site had an edit button”. Did I really type “realism” when I meant ‘reality’ (or was that the spell-checker anticipating my every move?

      • Rob
        January 22, 2018 at 11:11 pm

        What do you mean by ‘realism’ Ken?

      • January 23, 2018 at 11:07 am

        Futurist, author, and international consultant on sustainable development, Hazel Henderson charges that economics as we know it is not a science but “assumptions parading as science.” In her book “Paradigms in Progress,” she writes, “We must never forget that, in the most scientific sense, reality is whatever we pay attention to! Indicators only reflect our innermost core values and goals.” Economists pretend to be scientists, while authentic scientists follow the indictors of facts that follow from their goals and values. Their “areas of concern.” The basis of naïve empiricism is the belief that reality exists independently of observers. What humans encounter in their lives is much too complex, subtle, and multifaceted for that to be the case. Per Bruno Latour, “Everywhere, the empirical multiplicity of former `natural’ agencies overflows the narrow row boundary of matters of fact. There exists no direct relation between being real and being indisputable. Empiricism no longer appears as the solid bedrock on which to build everything else, but as a very poor rendering of experience. This poverty, however, is not overcome by moving away from material experience, for instance to the `rich human subjectivity’, but closer to the much-variegated lives materials have to offer.”

        What humans take as reality is always interactive. Reality is what humans find of interest and concern in their encounters with the endlessly faceted world.

        Maybe the words of high-energy physicist turned sociologist of science, Andrew Pickering, can make this clearer, “I seek to analyse its [Quarks] construction, elaboration and use in the context of the developing practice of the HEP community. My explanation of why the reality of quarks came to be accepted relates to the dynamics of that practice, a dynamics which is at once social and conceptual. I try to avoid the circular idiom of naive realism whereby the product of a historical process, in this case the perceived reality of quarks, is held to determine the process itself. The view taken here is that the reality of quarks was the upshot of particle physicists’ practice, and not the reverse: hence the title of the book, Constructing Quarks.”

      • Rob Reno
        January 23, 2018 at 5:37 pm

        Thanks Ken, appreciate that. Learn something new every day. Cheers.

      • Rob Reno
        January 23, 2018 at 5:39 pm

        Thanks Dave, hadn’t seen “active realism” before, so did some quick lookup. Leaned something new and interesting. Much appreciated.

    • January 23, 2018 at 5:47 pm

      Ken Zimmerman:Truth implies transcendence beyond the human sphere. Beyond what humans can grasp.

      No, it doesn’t. It just doesn’t. That is just not what people, the great majority, the mainstreams of philosophy mean by truth, which is pretty much the opposite: Human beans can grasp truth. That is why it is such a common, workaday word. To quote Hegel again: “Absolute Truth? – As if there were any other kind!”

      What is the point of overloading the word “fact” with the usual meaning of “truth” after depriving all meaning from “truth”? If this is just not word-play, it seems to me to exalt naive realism (not that there’s anything wrong with that :-) ), but hard to square with your criticism of it below. People might not object to anything else you say, I have none anywhere near as strong, but I don’t think that anyone who is trying to speak ordinary English in a consistent and intelligible manner can go along with contrived disparagement of “truth”.

      Insofar as you may be following Hume or other empiricists, I recommend to you and anyone else Thomas Green’s great prefaces to Hume and Locke. One can read them in his 19th century editions, downloadable public domain or in “Green’s Hume & Locke” edited by Ramon Lemos. For a couple of generations or so, as long as those were the standard editions, they served to get British philosophy out of its accustomed course of nearly a millennium.

      • Rob Reno
        January 24, 2018 at 2:04 am

        “What is the point of overloading the word “fact” with the usual meaning of “truth” after depriving all meaning from “truth”? If this is just not word-play, it seems to me to exalt naïve realism (not that there’s anything wrong with that :-) …” ~ Calgacus

        I just love of the creative nicknames used. Who doesn’t get a chuckle from Econoclast ;-) I don’t have a clue what creative thought went into your moniker Calgacus? God, I do hope it’s a moniker or I’m going to feel like a real arse ;-)

        I just wanted to say that in defense of common sense understanding of truth and fact–which does not mean one needs be necessarily naïve regarding deeper philosophical and conceptual paradoxes emerging from relativity and quantum mechanics–truth does matter and does not reduce to mere word play or semantics. Science would be a rather uneventful and boring enterprise were this true, and it would all be rather silly of them to so passionately argue for their given conceptual and theoretical positions if there where no such thing as a _real_ world outside their own minds that they so creatively think up experimental tests

        As Weiner notes, “Einstein’s principle is relativity, not relativism. The historian of science Gerald Holton reports that Einstein was unhappy with the label ‘relativity theory’ and in his correspondence referred to it as _Invariantentheorie_.”

        Even if our temporal and spatial measurements are frame-dependent, the observers who are attached to their different clock-carrying frames, like the respective observer on the platform and the train, can communicate their results to each other. They can even predict what the other observer will measure.

        The transparency between the reference frames and the mutual predictability of the measurement is due [to] a mathematical relationship, called the Lorentz transformations. The Lorentz transformations state the mathematical rules, which allow an observer to translate his/her coordinates into those of a different observer.

        _The invariant is the real_. This is a hypothesis about physical reality: what is frame-dependent is apparently real, what is frame-independent may be fundamentally real. To claim that the invariant is the real is to make an inference from the structure of scientific theories to the structure of the natural world. (Weinert 2004, 71)

        The interaction between facts and concepts and the interaction between science and philosophy give rise to a fundamental tension… The more fundamental their concepts are, the more humans cherish them. But when facts speak against the adequacy of the concepts, something needs to give way. Throughout the history of science, scientists and philosophers have often give up or modified the concepts in favor of the facts. Dissatisfied with the everyday notions of time and space, Newton set forth his notions of absolute time and space. Dissatisfied with the notions of absolute time and space, Einstein set forth his notions of relativistic time and space. In many of his writings, Einstein warned against the fixation of concepts. It would hinder the progress of science. (Weinert 2004, 95)

        The common territory between science and philosophy lies in the interaction between facts and concepts. In modern terms, realism means the belief that scientific theories capture, by degrees of idealization and approximation, the structure of the material world. Naturally, this view assumes there actually is a material world independent of our representations (models and theories and concepts) of it. As a realist Einstein would require that our theories represent, in approximation, the external structures of the universe. And the external structures represent fundamental constraints on the validity of the theories. Einstein insisted that our representation of the physical reality (models and theories) must be testable against what we know about the physical world.

        Nevertheless, others reached different philosophical conclusions. Perhaps if we step back and take seriously the fact and truth that scientists intimately involved in relativity and quantum theory sometimes reach different and opposite philosophical conclusions we can realize that a certain dose of humility is good for the soul and antidotes our human tendency to become dogmatic about our cherished views (not saying anyone is purposefully being dogmatic, only it is easy to be too make totalizing statements that leave little room for complementary perspectives. Far to much of what we think we understand about such things is, if we are honest with ourselves, deeply paradoxical and down right conjectural.

        Reference List

        1. Weinert, Friedel. The Scientist as Philosopher: Philosophical Consequences of Great Scientific Discoveries. Berlin: Springer-Verlag; 2004; p. 278.

        Notes: The quantum nature of the universe compels us to accept a universal kinematical non-locality. This entanglement between quantum systems is an experimental reality. A mathematical theory of entanglement has wrapped itself around it. It attempts to quantify notions like entanglement distillation, entanglement cost, mixed entanglement and bound entanglement states. What is philosophically most enticing about entanglement is the mystery of its dynamic origins. Some physicists and philosophers may want to relegate kinematic entanglement to the status of a brute fact. In the face of the ongoing discoveries and the conjectural state of scientific knowledge, this is as unconvincing as the stipulation of the ‘collapse’ of the wave function. As entanglement is a feature of the external world — it can be reproduced in experiments and will soon be a central feature of technological innovation — a huge explanatory gap will reside at the heart of modern physics, as long as the causal source of entanglement is not identified. Ironically, Einstein may be right after all: quantum mechanics is still incomplete. And if the cause of entanglement is found, our conceptual models of causation will be revolutionized.

      • Rob Reno
        January 24, 2018 at 2:07 am

        Doh! “experimental tests to throw against the wall and see what sticks ;-)”.

      • January 24, 2018 at 6:31 am

        Calgacus, I’m considering truth as a social scientist and historian, not as a philosopher, theologian, or activist. “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.” This famous phrase from the Declaration of Independence demonstrates the use of truth by humans. I repeat, USE. Truth is not a thing. It is a process that ties a statement to facts or reality. That’s certainly how it’s used by many posting here. And the most common dictionary definition of truth. Truth is also held to be the opposite of falsehood. Philosophers, theologians, scientists, and ethicists have debated the nature of truth, ceaselessly. And that’s in addition to the endless debates and struggles about it in neighborhoods, school board meetings, meetings of business boards, and in the US Congress. Philosophers have viewed truth as unconcealment (Heidegger), correspondence (Socrates, Plato, Thomas Aquinas), coherence (Spinoza, Hegel), constructed (Vico, Marx), consensus (Habermas), and pragmatic (Pierce, John Dewey, William James). All of these have something to offer but are difficult to reconcile. So, the debate continues. But even with debate ongoing humans still use truth to mark their paths for living and creating cultures. I tend toward pragmatic views of truth. Pragmatists like C. S. Peirce take truth to have some manner of essential relation to human practices for inquiring into and discovering truth, with Peirce himself holding that truth is what human inquiry would find out on a matter, if our practice of inquiry were taken as far as it could profitably go: “The opinion which is fated to be ultimately agreed to by all who investigate, is what we mean by the truth.” But the question of how truth is determined; how humans determine what to accept as truth remains unanswerable. That truth plays a large role in human cultures in undeniable. But we still cannot say exactly what that role is or what the truth that fits it is. There are hosts of competing assertions on such questions as to what constitutes truth: what things are truthbearers capable of being true or false; how to define, identify, and distinguish truth; the roles that faith-based and empirically based knowledge play; and whether truth is subjective or objective, relative or absolute. Testing the extremes, Friedrich Nietzsche suggested that an ancient, metaphysical belief in the divinity of Truth lies at the heart of and has served as the foundation for the entire subsequent Western intellectual tradition: “But you will have gathered what I am getting at, namely, that it is still a metaphysical faith on which our faith in science rests—that even we knowers of today, we godless anti-metaphysicians still take our fire too, from the flame lit by the thousand-year old faith, the Christian faith which was also Plato’s faith, that God is Truth; that Truth is ‘Divine’.” Nietzsche’s point seems perceptive, since we in the west are the only cultures on earth that place such emphasis on truth.

      • January 24, 2018 at 4:49 pm

        Great exchange with Calgacus, Ken. May I add that if I look back to the “truths” I held, believed in as I entered college as a freshman in 1968, that portentous year, many of them have been discarded as not true, half-true or illusionary by the time of my semi-retirement five decades later. Heavy doses of religion, intellectual history, and first hand life experience in the trenches of policy/politics, and just plain living, or attempts at it, and an added dimension, a must for modern and post-modern folks, a grappling with the psychological realm, the irrational side of family life all work as qualifiers, buffers and buffeteers to what I will summarize as the vestiges of the Christian world view I took from home back in 1968.

        And through it all, revisions, illusions, disappointments, I side with you Ken; we still do hold some truths to be self-evident, and fight for our understandings of them…through all the centrifugal and specialized perspectives we have to contend with, any hope of a future civilized or semi-civilized life, including towards nature on more of its terms, is only possible with some shared understandings of enough of the truth to prevent us from slaughtering each other on a regular basis, the background lesson of, forgive me, “Game of Thrones,” where the true heroes and heroines are physical dwarfs, and misfits of various backgrounds. I don’t know if that’s the message that gets through to the average viewer, but its the one I see lurking behind all the carnage.

      • February 8, 2018 at 12:07 am

        Ken hasn’t understood that truth is a pre-Christian concept indicating a relationship in Aristotle’s tree-of-life logic such that from a physical father-son-grandson relationship, it can be inferred that claims of this are true, also that the grandson is a descendent of the father. Thus John’s claim that Christ was the Truth meant he shared the genetic (hence behavioural) characteristics of God the Father; thus it is true the Father loves us, but not that the Father is the truth.

      • February 8, 2018 at 8:00 am

        Dave, I’ve included this version of truth in my earlier comment. My original statements apply: “Truth is not a thing. It is a process that ties a statement to facts or reality. . ..” But the question of how truth is determined; how humans determine what to accept as truth remains unanswerable. That truth plays a large role in human cultures in undeniable. But we still cannot say exactly what that role is or what the truth that fits it is. There are hosts of competing assertions on such questions as to what constitutes truth: what things are truthbearers capable of being true or false; how to define, identify, and distinguish truth; the roles that faith-based and empirically based knowledge play; and whether truth is subjective or objective, relative or absolute.” And the role of truth in human history is clearly pre-historical. So, again I refer you to Nietzsche’s contentions about truth.

      • February 8, 2018 at 9:50 am

        I see I was wasting my time: Calgagus had already disagreed with you. Let me be clearer: ‘truth’ is a word, so it can mean whatever Humpty Dumpty choses it to mean. I choose the way which works: if the tin contains what it says on the label, I will get the results I expect from acting on it. As I’ve said before: “Truth is an adequate representation of the facts for the purposes in question”. IMHO you are like Steve Keen’s fish, swimming in waters muddied by Hume. If you prefer to follow Nietzsche rather than Christ, you might reflect on the fact that Hitler did too.

      • February 8, 2018 at 11:05 am

        Dave, let’s leave David Hume out of this. Per St. Augustine, “All truth is God’s truth.” But we still don’t know truth when we see, hear, taste, or smell it. Maybe God knows it. But humans DO NOT. The human approach to truth is to work for a consensus. To build coalitions. To work for understanding. And call this truth. If you can’t accept the stress and tension involved here, retire to a sanctuary. How about a monastery? But this is just the normal stress and pressure of human life.

  11. January 21, 2018 at 4:02 pm

    As usual, great comment Ken Zimmerman. I don’t know that we should end economics, such as it is. I think this site and the papers and commentators are doing a pretty good job of “dis-enthralling” us of our illusions about economics and those who practice it as if it were unassailable science – even as good science has its own process of creative destruction: witness the findings dethroning the GHG merits of the bridge fuel to the non-carbon future: natural gas.

    At some point along the great curve of the maldistribution of income and wealth, a public consensus will emerge that, if this is what is meant by the gifts that economics delivers, I’m sending it back. If only we could do that and keep most of the “benefits.”

    • January 22, 2018 at 7:40 am

      Gracchibros, I’m not worried much about economics the science. I’m worried about economics the political action pressure group. And, economics the club for sociopaths. And, economics the play-for-pay gangsters. I support those who attempt to unscramble the current skewed economy and act to fix it, even if the fixes are not complete. I know many historians, anthropologists, sociologists, and others working on this. Too few for certain, but more than the number of economists I know looking for a fix. Maybe I just need to be educated. I hope that’s the case. I hope economists recognize the deep dangers facing the US if the arrangements economists helped create and now defend is not changed soon.

  12. January 21, 2018 at 5:22 pm

    It seems to me there is a lot of apples and oranges in this discussion.

    My view of the history is this: politics and economics were entangled in the field call “political economy” until late in the 19th century, when economics became more and more dominated by the math, which made it more and more technocratic and “objective”. Politics didn’t bother with math until nearly a century later, when it became infected with public choice theory, which was based upon math economics market fundamentalism.
    But all economies are systems, created or evolved by people to be run by people to serve people’s material needs. People. Human beings.
    Politics is more than two people working together to accomplish something. Politics is inherent in any honest comprehensive analysis about how to build an economic future that works.

    And, about the technocratic pretense of objectivity:

    “A ‘disinterested’ social science has never existed and, for logical reasons, can never exist… The only way in which we can strive for ‘objectivity’ in theoretical analysis is to expose the valuation to full light, make them conscious, specific, and explicit, and permit them to determine the theoretical research … The stated value premises, together with the data … should then form the premises for all policy conclusions.”
    — Gunnar Myrdahl, Objectivity in Social Research (1969)

    In his classic, An American Dilemma (1944), Myrdahl strongly advises people to put their biases on the table on the outset and not pretend.

    • Rob
      January 21, 2018 at 6:18 pm

      Thank you Econoclast. That corresponds with what I have learned from Berstein and beautifully summarizes it bringing further clarity to my thinkingjust

    • Rob
      January 21, 2018 at 6:18 pm

      Thank you Econoclast. That corresponds with what I have learned from Berstein and beautifully summarizes it bringing further clarity to my thinking.

    • January 22, 2018 at 7:42 am

      Concur, Econoclast. But you’re fighting 400 years of scientific realism. That’s a big mountain to climb.

      • January 22, 2018 at 1:13 pm

        I don’t know anything else to do but climb mountains :)
        With Dylan Thomas, “I’ll not go gently into that good night.”

    • Rob Reno
      February 7, 2018 at 10:43 pm

      And on the VIX. I do not follow it so am not sure how it behaves…. You tell me that I am ignoring that causality. Have you looked into it?

      I at least read MacKenzie’s post and noted correctly what he was saying, rather than emotionally responding to trivia therein. To be precise, what I said was that if the VIX was intended to be a measure of volatility, but has instead been turned into a trillion dollar casino for speculative investors, are we not transforming a risk measure into a game of risk with radically uncertain potential negative feedback loops? That is after all the entire point of Donald MacKenzie and his cautious warning of unexpected feedback loops:

      The most interesting of all these ETFs is the one that traders know by its ticker symbol as the XIV. The XIV is an ‘inverse’ ETF: buying it is the equivalent of betting that volatility, as measured by the VIX, is going to continue to fall. That may seem esoteric, yet by last April, the XIV had climbed to 34th in the ranking of US shares by trading volume, surpassing blue-chip corporations such as Chevron and Pfizer. Actually it isn’t surprising that the XIV has been so successful: buying it is the most straightforward way for an amateur trader to bet that the VIX will fall, and, as the FT puts it, that bet ‘has trounced the returns of pretty much everything since the [banking] crisis’. Five years ago, you could buy a unit of the XIV for less than $20. In November 2017, you could have sold that unit for nearly $110, a return on your money of nearly 500 per cent. (….)

      These trades increase the supply of these options, helping keep their prices, and thus the VIX, low. There is a feedback loop here, and it seems to have been operating on an industrial scale: so far, quite sufficient to keep the fear gauge seemingly stuck at the bottom of the scale…

      Many people in the markets suspect as I do that a loop of this kind explains why the VIX remains low. But we can’t be entirely sure. Things like this typically become clear only in retrospect, and sometimes not even then. I can’t even decide which prospect worries me more: that the ‘loop’ explanation is right or that it’s wrong. If it’s right, the danger comes from the fact that feedback loops in finance can suddenly fling themselves violently into reverse, causing severe whiplash. That was almost certainly an important element in the 1987 crash. Market participants who had ‘portfolio insurance’, an automatic hedging strategy based on the Black-Scholes-Merton model, needed to sell large numbers of S&P 500 futures contracts quickly, and that selling pressure fed through into the underlying stock market, contributing to a fall in share prices of around 20 per cent – the worst ever single day in the history of trading in the US. If all those market participants, amateur and professional, who are betting on the VIX remaining low were all at once to change their minds and try to liquidate their positions, a disruption on the scale of the 1987 crash couldn’t be ruled out.

      Fast forward to here we see on NPR a discussion that mirrors the question raised by MacKenzie, and I assume, MacKenzie’s cautious warning, was the reason the editor shared the link:

      The VIX is a measure of how volatile the markets are, and the reason that is important right now is because there are a lot of these very complex financial instruments that let investors bet against the VIX. In other words, when the market is calm and volatility is low, they go up. And when the market is volatile like it was today and yesterday, they go down.

      And these have become a lot more popular over the past few years. Investment funds buy them. There have been estimates that there are a trillion and a half dollars’ worth of these all over the world. And so this has led to some really steep losses this week, and there’s a lot of speculation that it’s responsible for some of the turmoil we’re seeing in the markets. (NPR February 6, 2018, Heard on All Things Considered)

      • February 8, 2018 at 8:23 am

        Rob, you’ve nailed it. When a society allows great inequality and injustice in wealth, and many of the wealthy either by lack of inclination or intelligence cannot perform useful work, some of these wealthy invent games for themselves. Such as wagering on financial volatility. Add fast computers and complex algorithms, and there you have an entertaining digital video game. Also, a game that has the potential to destroy businesses, governments, and even the planet, along with millions of Sapiens lives. And when those who invented and play these games become bored with one game, they invent another. So, betting on volatility will not be the last game. Next, perhaps, betting on the level of negative vs. positive consequences from volatility betting.

      • Risk Analyst
        February 8, 2018 at 8:52 pm

        Rob, I’ll respond to you because you quoted me. First, let’s recap this whole (badly named) Heisenberg idea that measuring something impacts it. This is definitely true for credit default swaps in which the product created impacted the probability of default of the underlying. This can be contrasted to bitcoin (not a good example but I’ll go with it) which is isolated from and has no measurable impact on currencies. So where does VIX stand between these extremes? The jury is still out (there is much debate among the professionals) but right now it seems likely that VIX trading had little impact on market volatility. Two ideas among many:

        One is that the direct market for volatility products is relatively small. You mention trillions. The whole financial markets are in trillions, but volatility products are rather small. The two major vehicles in the popular media that you specifically mention are the inverse VIX securities, XIV and SVXY, which in sum fell from $3 billion in assets to $150 million. In other words, peanuts compared to the equity market. A three billion dollar impact is not enough to bother reporting on a regular day unless perhaps some financial writers such as your NPR guy are grasping at sexy sounding explanations for something.

        Second, the VIX sell off just does not align very well with the S&P sell off. Look at the data during the equity sell off. Chart it with say 10 minute tick marks though the day and it looks like the VIX lagged behind the S&P, but even worse it was only after the cash markets (S&P500) closed for the day that only then the VIX spiked. The timing looks bad in trying to blame the VIX for market volatility. It seems more like the VIX was reflecting the increase in volatility from equities, but due to very low liquidity in that product, the prices spiked after the market closed.

        My point is not to deny any Heisenberg impact here, but to say that to make such a claim, one should have a reasonable theoretical and empirical foundation. That foundation exists for credit default swaps impacting default risk, but has not been shown for the VIX impacting equity market volatility. It sure makes a great sounding talking point, but there should be substance behind it.

      • Rob Reno
        February 9, 2018 at 3:30 pm

        Thanks, appreciate the analysis. Did the VIX trigger automated trading and did this have any role? Kind of like a knock-off effect, start small and trigger cascade? Or perhaps we will never know?

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