Guan/02138

I received Fischer Black’s festschrift edited by Bruce Lehmann a couple of days ago. It includes a passage that does a good job of capturing Fischer’s view of finance, and perhaps why Nassim Taleb calls it “the softest of the soft sciences”, and which is worth quoting at length:

I have also stressed the sense in which this model does not produce falsifiable, testable hypotheses that can be compared with evidence. It is distressing to discover that it is a theorem that economics is vacuous but, viewed in isolation, the hypothesis that asset markets are in equilibrium is just so much empty rhetoric. But we do not view markets in isolation; we implicitly and explicitly bring a mixture of intuition, conjecture, and knowledge to our research. As Fischer put it:

I think more about a group of stylized facts that summarize the world as I see it. These are my observations, derived from everyday experience, from reading newspapers and magazines, and from studying technical publications . . .  I think we can explain all of these puzzles using sample models derive from the full general equilibrium model with general von Neumann–Morgenstern utility. What’s important, I think, is to explain the stylized facts in a deeper sense. We want to understand the underlying economics.

On this view, our enterprise involves the exploration of a region of model space centered around the stylized facts and economic intuitions that we find compelling. Students of financial markets differ in precisely what economics and evidence they find compelling. These differences arise largely because we do not have direct and credible measurements of the determinants of preferences, technology, beliefs, and the extent to which investors make choices and interact in markets according to our models. In the absence of such knowledge, the model constitutes a language for describing and organizing our thinking about financial market equilibrium, not for making predictions about it.

And at the end of Lehmann’s introductory essay, another quotation from Fischer:

No doubt the reader’s glasses differ from mine. But we are all looking at the same world, and the technology for making glasses is constantly improving. Someday it will all be clear.