Physics envy?

As any academic economist who has done consulting fr government or the private sector can testify, it is very difficult to convey the uncertainty about your results and contract givers expect precise numbers with no standard errors. It is particularly ironic that the financial industry, which lives from uncertainty, cannot cope with advice that has qualifications and caveats.

This interpretations does not appear to be shared by Andrew Lo and Mark Mueller, who claim that economists suffer from Physics envy in the sense that they want precise results like in a Physics laboratory. They see part of the reason for the current crisis in the large reliance on quants in the finance industry, and that those quants have neglected that market participants do not behave like electrons, they have feelings and can be unpredictable.

I share with the authors the belief that this crisis is not a failure of Economics and economists, but rather that the expectations of the customers of those economists were way too high. And when those customers were disappointed, they blamed the profession. This rather long paper tries to educate those customers how it really works in Economics, and shows that even Physics is not immune from this unpredictability.