Archive for February, 2009

Risk, Uncertainty, and Financial Markets

| Peter Klein |

A quick follow-up to Nicolai’s post on the copula function: See also this item on Gary Gorton’s role in the financial crisis, which includes Warren Buffett’s great line: “Beware of geeks . . . bearing formulas.” And items on Knightian uncertainty here and here.

And there’s this passage from Darren Aronofsky’s cult classic Pi:

Restate my assumptions: One, Mathematics is the language of nature. Two, Everything around us can be represented and understood through numbers. Three: If you graph the numbers of any system, patterns emerge. Therefore, there are patterns everywhere in nature. Evidence: The cycling of disease epidemics;the wax and wane of caribou populations; sun spot cycles; the rise and fall of the Nile. So, what about the stock market? The universe of numbers that represents the global economy. Millions of hands at work, billions of minds. A vast network, screaming with life. An organism. A natural organism. My hypothesis: Within the stock market, there is a pattern as well. . . . Right in front of me . . . hiding behind the numbers. Always has been.

This is before the speaker, the mathematician protagonist Max Cohen, goes literally insane. That’s what quantitative financial modeling can do to you.

24 February 2009 at 5:54 pm 6 comments

Copula Functions and the Current Crisis

| Nicolai Foss |

Forget about effective demand failures, malinvestments caused by expansionary monetary policy, or even political regulation of the US housing market: The  true bete noire in the current meltdown is a specific copula function (here is the Wiki on copulas), or more precisely David Li’s application of it to the modeling of default correlation (here). Or, so Wired claims. Writer Felix Salmon is pretty explicit in his condemnation of Li’s approach:

It was a brilliant simplification of an intractable problem. And Li didn’t just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never mind all that, he said. The only thing that matters is the final correlation number — one clean, simple, all-sufficient figure that sums up everything.

Apparently, major finance academics — like Darrell Duffie — had warned against the application of Li’s work.

I am by no means competent to pass any judgment on Salmon’s story. I merely recommend it as a highly interesting read — and wonder how long it will take before the performativity-in-financial-markets-crowd picks it up. Actually, it may rather support the Felin & Foss argument that false social constructions are eventually weeded out (here).

24 February 2009 at 6:46 am 10 comments

More on the Evolution of Accounting

| Peter Klein |

For some reason posts dealing with accounting are among our most popular. Perhaps this says something about the Nerd Quotient of the typical O&M reader. Anyway, if you liked the recent post about the evolution of accounting rules, you may enjoy this paper that looks at the problem more systematically.

Accounting is an Evolved Economic Institution

Gregory B. Waymire and Sudipta Basu

We consider accounting from an evolutionary perspective. Accounting encompasses the creation of transactional records, the summarization of records in t-accounts, and the preparation of audited financial statements. Accounting’s history spans at least 10,000 years dating back to the first human settlements in ancient Mesopotamia. Our focus is on the study of accounting history in three ways: providing useful thoughts experiments valuable to researchers interested in the development of modern practices, the use of historical data to test formal hypotheses about the origins of accounting practices, and the development of theories and related empirical evidence that explain accounting based on evolution and ecological rationality. Within this third area, we describe the basis for hypotheses and empirical analyses concerning six issues: (1) the emergence of recordkeeping, (2) the effect of double-entry bookkeeping on the scale and scope of economic organization, (3) the spontaneous emergence of norms of practice in accounting, (4) the impact of law, regulation, and taxation on accounting, (5) the demand for broad principles in evaluating accounting method choices, and (6) the relation between economic crises and major discontinuities in accounting practice.

24 February 2009 at 2:10 am 3 comments

Game Theory Timeline

| Nicolai Foss |

Here. Has nothing happened in GT since 1994?

23 February 2009 at 11:46 am 2 comments

Slides on “Putting Entrepreneurship into Strategy and Organization”

| Peter Klein |

You’ve read the book. You’ve seen the movie. You attended the seminar. Now download the slides. Or something like that. Anyway, Lasse begged me to post the slides from this morning’s talk at NHH — or maybe he begged me not to post them, I forget which — so here they are. Some of the slides may not make much sense without the animation (and accompanying patter), but sadly the event was not captured on video, where it could have won next year’s Oscar in the “Best Obscure Academic Talk” category.

23 February 2009 at 11:02 am 1 comment

Relations Between Micro and Macro Levels

| Nicolai Foss |

Levels issues, micro-foundations, methodological individualism and collectivism, etc. have long been O&M favorites (e.g., here, here, here, and here). While the O&M bloggers are card-carrying methodological individualists, we also (like all other economists and management scholars) acknowledge that macro matters, in the sense that it may be meaningful to think of variables placed at macro levels exerting an influence on decisions made at micro variables (as in the Coleman diagram; see here). The question is, what is the nature of this “relation”? (more…)

22 February 2009 at 4:20 pm 5 comments

Signs of Getting Older

| Nicolai Foss |

My hair is thinning, I can still run those 4 kms in 18 mins or less, but no so easily anymore, I find myself reading obituarities — and here are my selected papers, fresh from the press, on Knowledge, Economic Organization, and Property Rights. I take solace in the fact that these are only selected rather than collected papers. (more…)

22 February 2009 at 3:07 pm 2 comments

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Our Recent Books

Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).