The Real Trouble Starts When We Think We Can Calculate Everything

RISK OFTEN ESCAPES CALCULATION, SAID KEYNES, AND HE IS SUPPORTED BY BLANCHARD AND ROMER TODAY, AS MASSIMO AMATO RECALLS

Uncertainty is the only certainty there is, the readers of John Maynard Keynes’ The General Theory of Employment, Interest and Money must have thought in 1936. We need to recover this idea in the context of financial markets, says Massimo Amato, researcher in Economic History.

“According to Keynes, economists struggle to accept the existence of incalculable risks. This is what Keynes called fundamental uncertainty. The rationale of financial markets, by contrast, is their capacity for standardization of risk by the quantification of asset prices”. This is not antiquated economics. Two mainstream scholars have recently addressed the issue of the opacity in financial markets. “Olivier Blanchard said that, due to the unpredictability of the markets, a new crisis is strongly possible. Paul Romer wrote that in the last thirty years macroeconomy has not progressed, it has rather regressed. A Nobel prize-winner, Romer said that the implicit assumptions of econometrics do not provide reliable indicators of the economic cycle”.

Massimo Amato therefore points out the need to restore a greater sense of prudence. “If we can give a price to every risk, then we can take any risk. This argument does not take into account the systemic risk that, once revealed, throw calculations off course”. The effect of a new crisis is unforeseen and unmanageable. According to Amato, it is desirable to adopt financial models not based exclusively on price risk considerations. They should take into account the existence of events we are not aware of.

“Financial markets bargain the precariousness of the basis of knowledge from the facts that happen in time with the precariousness of the convention that leads financial calculations and expectations. As Keynes said, the only thing we know is that there are things we will never know. We should be aware of this, in the name of market efficiency”.

Read more about this topic:
Massimo Marinacci. Understanding Risk in Companies and Our Lives
Corporate Governance Is not Safe from Black Swans
A Bridge Where Decision Theory Meets Risk Analysis
Policy Makers React to Ambiguity Like Other Humans Do
No Economic System Is Safe. Shocks Travel Quickly and Unexpectedly
When International Trade Increases the Chance of Conflict
With the Monte Carlo simulations, an epochal revolution in the probabilistic risk assessment of business plans has arrived
How to Make Your Non-performing Loans Harmless
New Sanitation System Can Half Healthcare Associated Infections and Reduce Related Costs by 75%

by Claudio Todesco