BRAIN DRAIN

A worthy addition to the growing number of available “popular economics” titles is Robert Frank’s The Economic Naturalist. It’s a book that grew out of the Cornell Economics Professor’s penchant for asking his students to write short essays explaining the economic intuition behind fairly everyday phenomena.

The appeal of The Economic Naturalist lies in that the esteemed professor does not attempt so much to offer the run of the mill general reader on economics. Instead, he opts to demistify more ordinary occurences that we perhaps take for granted. Why is it that twenty-four hour convenience stores have locks on their doors if they never close? Why do drive-through ATMs have braille on their keypads, even if the blind can’t drive? Why is the price of brown eggs more expensive than white ones, considering that an egg is an egg is an egg? These are just some of the questions that Frank examines through an economist’s lens, resulting in discussions that are more often than not quite enlightening.

It goes without saying that the book dials down much of the rigor required by economic analysis in favor of simpler (at times even simplistic) explanations for the topics under consideration. For the most part, it is an approach that works in the book’s favor: even where Frank’s discussion may come across as a bit of a stretch — which does occur — there is at the very least some modicum of analysis being offered. Further, more “serious” readers will be pleased to know that hidden in between the often amusing and mundane questions the book tackles are some of the more weighty questions that have captivated economists, past (there are a couple based on George Ackerloff’s research, for instance) or present (such as Chris Anderson’s observation of the “long tail”, which also finds its way to the book).

Those looking for an easy and at once interesting read on economics need look no further than Robert Frank’s book. The Economic Naturalist is that rare title which manages to remind its readers that beyond the equations and graphs, economics is in fact a versatile and interesting subject to study.

A few years ago, my dad went on a tear reading books on the subject of how we understand the world around us. Naturally I ended up his willing accomplice. Among the books he passed my way included such titles as Malcolm Gladwell’s Blink (loved it), James Surowiecki’s The Wisdom of Crowds (loved it) and Freakonomics by Steven Levitt and Stephen Dubner (hated it). Recently, my dad went through such a bout of subject-specific reading that found two more books of a similar nature headed in my general direction — and I am altogether glad for the experience.

The first of these was Nassim Taleb’s The Black Swan: The Impact of the Highly Improbable, a treatise on the flaw of assuming statistical normality. The eponymous “Black Sawn” is of course a reference to how the actual “discovery” of black swans threw into disarray the once held certainty that “all swans are white”. It is therefore a metaphor for the shortsightedness of human reason and the unmistakable tendency of people to be blindsided by the exceedingly rare occurence. In this regard, the Black Swan that Taleb writes about is an event with three characteristics: it is an outlier (that is to say, improbable), has a huge impact, and people tend to try to explain it retrospectively.

The subject of the Black Swan is something of an obsession for Taleb, who first touched on the subject in his book Fooled by Randomness (which dad also passed my way the last time around). Compared to that first offering, The Black Swan fleshes out the subject a little more methodically and certainly in more detail. For instance, there is a straightforward discussion situating the crux of the matter within the broader issues surrounding positivism such as the problem of induction articulated by David Hume or the principle of falsifiability put forth by Karl Popper. More, the copious anecdotes used to get the message across make the book reasonably accessible and often amusing for a topic that should otherwise be technical and awash in the jargon of statistics or probability.

Although undeniably interesting, The Black Swan nonetheless suffers as much as Taleb’s first book did in that his ideas — and ego — outshine his writing by far. In a sense, Taleb is too smart for his own good, and one gets the impression from reading the text that it is his firm belief that only he can be right (because he’s just far too intelligent to be wrong). Also, as in his prior work, a large chunk of the text transforms into a rant against the stupidity of otherwise intelligent people that oozes condescending. On a more personal note, a central metaphor used by Taleb throughout the book — that pertaining to the difference between what he calls “mediocristan” and “extremistan” — really didn’t work for me and came across as overly pretentious. Having said this, I must concede that there is a fair amount of insight and maybe even entertainment to be had from this book provided one is able to overlook Taleb’s excesses and shortcomings as a writer.

The second book thrown my way was Benoit Mandelbrot’s The (Mis)Behavior of Markets: A Fractal View of Risk, Return and Reward. Co-authored with journalist Richard Hudson (which perhaps explains why it is so much better written than Taleb’s book), it is a simple reader on the shortcomings of standard financial theory. Indeed, the first half of the book outlines the key contributions to modern finance leading to the development of the oft-cited Capital Asset Pricing Model, offering a very sober discussion of its limitations and its sometimes unrealistic assumptions. The second half of the book is devoted to explaining fractal geometry, pioneered by Mandelbrot himself, ultimately making the case for its applicability to financial analysis.

Given the subject matter, what Mandelbrot and Hudson have to offer is surprisingly light and very engaging reading. The main drawback, however, is that the book delves into the more interesting subject of fractal geometry in only a cursory manner, which is to say far less than the book’s title and preface seem to imply. Those intent on a more detailed treatment of the subject would be better served looking up Mandelbrot’s other works. For what it is, however, The (Mis)Behavior of Markets is the type of book that those with even a passing interest in finance would do well to peruse.

[This is a follow-up to a prior entry on "Non-Stochastic Reading". To read the earlier piece, click here.]