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An Epistemological Crisis February 10, 2009

Posted by Dwight Furrow in Current Events, Dwight Furrow's Posts, Philosophy.
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Why is there so much financial instability given the fact that it is in everyone’s interest to have stability. Are we just irrational and unable to ascertain or act on our interests. Is it greed, excessive risk taking, or the inevitable result of tumultuous competition getting rid of the less efficient? All of these explanations play a role. But the more fundamental problem is epistemological.

 

Buying stocks is like professional gambling—the people who are good at it are good at assessing risk. But precise risk assessment is always impossible. We cannot carve up the future in manageable bits and assign probabilities to them. The world often changes in ways we did not anticipate and sheer complexity overwhelms any attempt to discover useable regularities. The investment instruments devised by investment banks to securitize mortgage and consumer loans were so complex that no one understood their true value and the great unraveling was far more precipitous than anyone predicted.

 

When risk assessments collapse and we are confronted with uncertainty we tend to rely on habits or do what has worked in the past. So in the run up to our current crisis we believed platitudes like the stock market always trends upward in the long run or housing prices will never fall. These were propositions for which there was some evidence. But this reliance on habit and convention is a fatal error when the unexpected happens—what has worked in the past is ill equipped to respond to novelty.

 

What we needed in our recent past, especially from business and government, was skepticism, more distrust in our ability to calculate the future, which would have encouraged more saving, more scrutiny, more caution, less leverage. It was not exactly irrational to believe in our ability to assess risk. It wasn’t a matter of assessing evidence well. After all, you don’t know what you don’t know. You can’t really have evidence for the unexpected. (See Taleb on this point) Instead we needed epistemological virtue—a recognition of the limits of knowledge, reticence about believing in our powers of prediction. Especially because much of the uncertainty was of our own making

 

Much of the blame for our lack of epistemological virtue should be placed at the feet of modern economics. The dominant, free-market equilibrium model assumes that prices (including the price of risk) always find an equilibrium and that markets are fully efficient when there are no externalities. And we are encouraged to think that our mathematical wizards can describe this equilibrium regardless of the complexities of the situation and capture all externalities in the price. Mathematicians designed most of the securities that caused such a problem in the credit markets; and decisions to buy and sell stock, made by large institutional investors, are generated by complex mathematical models with little human intervention.

 

This fascination with mathematical models assumes that behind the imperfections of the messy world we live in there is a world of perfection with formulaic harmonies that can be known with the certainty. And through our efforts we can aspire to this ideal. But there is no such world.

 

Platonism still lives in the cubicles of Wall Street offices. And we cannot defend ourselves from black swans and white ravens until we are rid of Platonism.

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Comments»

1. Paul Moloney - February 15, 2009

The problem might be Plato being on Wall Street in the first place. It does not seem possible that any greedy person would be able to understand philosophy. If they did, they would not be greedy. This is not to say that anyone on Wall Street is greedy. Economic problems, though, are not created by reason and intelligence; they are solved by reason and intelligence. If such problems are not created by intelligence and reason, it would seem that they are caused by their contraries, greed, which is unreasonable, and ignorance, which is the lack of intelligence.

Since Dwight has so many relevant points in his posts, it can be difficult to find a suitable place in which to begin a comment. By the time you think you have a relevant comment to make, he has a new post. Thus my late comment.

I have to wonder what philosophy has to do with the economy, but there seems to be a definite connection, even if it is an accidental one. After twenty-three years of working full time with benefits, I am now making less money than I had been and with no benefits. It is actually a part time position. It had not been such a big deal because my wife, Tamar, was working full time with benefits, until she got laid off recently.

Though low-paying, the job allows me to pursue philosophy, and I took the job with the intention of it being only temporary. This was before the so-called economic crisis hit, of which Tamar is a victim. I have noticed something about this job because of the economic crisis. I work at a copy shop that now does the packets for Mesa College. The previous company went out of business. (I must say I had the chance to look over Dwight’s packet and the packets of two other philosophy professors at Mesa. I must also say that those packets are very impressive. Despite the weak economy, Mesa has a very strong philosophy department.) If someone goes out of business someone else is going to get the business.

I have also noticed that this company has been doing more business since I have been there, even though I have nothing to do with getting more business. The owner, a woman, is now talking about the company growing, for the first time, even in the midst of the economic crisis. I definitely think philosophy has made a difference to the company through me, albeit an accidental difference. People seem to get a sense of stability from my presence, even if it is only from my voice over the phone. People seem to think I know what I am talking about simply by the sound of my voice. I work back in the warehouse, and because it is a small company, everyone is expected to answer the phone. I have nothing to do with the information customers are seeking over the phone.

Besides all the other things we learned in Dwight’s philosophy of art and music class, we learned how to rock and roll. Whether there is a bad economy or not, I have to get ready to rock and roll in regards to philosophy when I wake up in the morning. Without rocking and rolling there ain’t no philosophy. When I’m waiting for the bus that takes me to the trolley, I am reading William James. When I am on the trolley I am reading William James. Before William James it was Aristotle, and so on and so forth. Depending on the distractions on the second bus, I continue to read or begin to write something new. Many times on the first bus after work, I have no chance to read or write. The general population seems to be hostile to philosophy, at least those that use public transportation. By the second bus after work, I have the chance to continue reading a book in philosophy or one of the philosophy magazines that are published from England. On the third bus I continue the same or re-write stuff I have written more than twenty-five ago.

When it comes to philosophy, one has to rock and roll, no matter what the circumstances, or else philosophy will never get done. If philosophy never gets done, there will be no stability in society. If there is no stability in society the economy will never recover. There is no reason to give up on philosophy, especially if philosophy is the only thing that keeps us going. I have no intention of allowing Arnold to stop me from doing philosophy, especially considering I have been doing philosophy longer than he has been governor, to say the least. I am thinking that those that are pursuing philosophy can give more stability to the State of California than any politician can.


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