“There’s a sense that ergodicity economics can’t possibly be right because it’s too simple,” said Oliver Hulme, one of the experiment’s designers. However, it “made a very bold, falsifiable prediction” that stood up, he said.
Peters asserts his methods will free economics from thinking in terms of expected values over non-existent parallel universes and focus on how people make decisions in this one. His theory will also eliminate the need for the increasingly elaborate “fudges” economists use to explain away the inconsistencies between their models and reality.
And according to Peters, one of those “fudges” just happens to be the entire field of behavioral economics, which has won widespread acclaim — not to mention a couple of Nobel Prizes — over the past decade for explaining all the mind-bending ways people don’t act rationally. Instead, he says the field might be better explained as a symptom of economics’ lack of formal rigor.
It’s no surprise that economists haven’t quite embraced Peters’ point of view. Numerous economics journals have rejected his paper on the basis that it simply wouldn’t be of interest to their readers.
Benjamin Golub, an economics professor at Harvard University, is less charitable. He lambasts Peters for misunderstanding the economic theory behind decision making and says Peters’ work ultimately amounts to little more than a straw-man argument that solves a narrow set of problems that already had well-known solutions.
“Peters’ thesis is that he has discovered a hidden assumption of economic theory that undermines its validity, but it’s not there,” he wrote in an email. Even if Peters wasn’t “confused” about the content, Golub says “he would still be off the mark understanding what its remaining open problems are. That is part of the reason no expert takes him seriously.”
Nevertheless, Peters’ theory has earned plenty of praise from heavyweights outside of economics. Taleb, of “Black Swan” fame, has promoted Peters’ work on Twitter and in his own scientific papers, and has called his findings “100% correct.”
Mauboussin, the former head of global financial strategies at Credit Suisse, Rick Bookstaber, a former risk manager at Bridgewater who helped draft the Volcker Rule while serving at the SEC and U.S. Treasury, and Emanuel Derman, a pioneer of quantitative investing, have also supported Peters’ research on ergodicity economics.
His paper, which ultimately found a place in the prestigious Nature Physics journal, quickly became one of its most popular. (For what it’s worth, his work has even inspired a hardboiled, German-language thriller titled Gier, about a man who was murdered for his incendiary ideas about economics.)
“The notion of utility may exist, but not in the way the psychologists and economists have modeled it,” Taleb said. “The results are monstrous.”
This article was provided by Bloomberg News.