Archive for 3 November 2008
Beware of Geeks Bearing Formulas
| Peter Klein |
The entrepreneur, writes Mises in one of my favorite passages, “is a speculator, a man eager to utilize his opinion about the future structure of the market for business operations promising profits.” The entrepreneur relies on his “specific anticipative understanding of the conditions of the uncertain future,” an understanding that “defies any rules and systematization.”
This passage was in my mind today as I read the WSJ front-pager about the computer models used by AIG to analyze asset risk. Poor Gary Gorton, who designed many of AIG’s models, is put on public display. AIG’s catastrophic failure is likely to fuel skepticism about the use of such models for risk analysis, though Gorton maintains the problem was the application of the models, not their basic design. (His Yale colleague Ian Ayres will likely agree.) Longtime skeptic Warren Buffet has the best line: “Beware of geeks . . . bearing formulas.”
Today’s paper also includes an item on Harry Markowitz, including this:
As with all new information tools at our disposal, applying portfolio theory to investing entails its share of trial and error. Mr. Markowitz admits some people might object to asking him how to repair the credit crisis. “You, Harry Markowitz, brought math into the investment process,” he imagines some people thinking. “It is fancy math that brought on this crisis. What makes you think now that you can solve it?”
He draws a line between his portfolio theory and its later misapplication. “Not all financial engineering is always bad,” he says, “but the layers of financially engineered products of recent years, combined with high levels of leverage, have proved to be too much of a good thing.”
Update (Nov. 5): See this related piece from the Times.
New Issue of Strategic Entrepreneurship Journal
| Peter Klein |
Volume 2, number 3 of the Strategic Entrepreneurship Journal, a special issue edited by Sharon Alvarez and Jay Barney on “Opportunities, Organizations, and Entrepreneurship,” is now out. It features my paper “Opportunity Discovery, Entrepreneurial Action, and Economic Organization,” Nicolai’s paper with Kirsten Foss, “Understanding Opportunity Discovery and Sustainable Advantage: The Role of Transaction Costs and Property Rights,” and several others of interest. The abstracts from my paper and the Foss & Foss paper are below the fold. (more…)
Organizations and Markets 
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