Monday, March 16, 2009

Skepticism and Economics

I'm studying economics, and despite the fact that I will be specializing in microeconomics as I finish my PhD - I know a fair amount about the macroeconomics of the recent crisis. I also know a fair amount about the stock market, finance, mortgages, and securities ... etc...

The other day Jon Stewart had Jim Cramer of mad money on his show (watch it here, its chilling)*** and called him out on some shady hedge fund stuff that he used to do. He also called him out on his shruggist attitude and sensationalist approach on his TV show where he knows his advice is often on the 'pretend market' (which is explained perfectly by Jon on the show).

I hope that mixing economics and skepticism will catch on soon - it is uncharted territory in the skeptical community. Skeptics on the whole know a fair amount about religion, natural science, psychology, medicine, literature, and philosophy. However, I think that skeptics have yet to truly add business and economics to their repertoire. I certainly do not blame skeptics for this, if anything economics is an extremely convoluted and often esoteric field.

The recent events that lead to the crash is such a great example of why this is the case (that is, why skepticism ought to begin lending their critical thinking to these areas). Not to mention the Bernie Madoff tens of billions of dollars ponzi scheme that was just revealed. Anyway, there are so many intricacies that make up the 'markets' and thus many places for experts to take advantage. Also, when it comes to big investments that make your life better off - such as buying a home - many people are nearly clueless as to what is going on (its not every day you buy a house, unless of course you're a lender or an agent). Unethical people use this asymmetry of information to their advantage every day - one example of this was the predatory lending and ridiculous leveraging going on in the sub prime markets that contributed to the crisis.

I hope to make more posts that directly link economics to skepticism and business to skepticism as well as include this in the podcosts. Like I said before, skeptics usually know a lot about science and so on - and to continue fleshing out a well rounded base of knowledge and understanding is essential to inquiry and critical thinking.

***As a side note, the 35:1 leveraging mentioned in the video above is the ratio of debt to equity in an investment. For example, someone wants to buy a home for $360,000, and they only have $10,000 to pay as a down payment - if the bank approves this, then the debt:equity is $350,000:$10,000, which simplified is 35:1. This higher this ratio, the riskier the investment. The rule of thumb (without considering income for now) is to have a 10% down payment. So to use the example again, the down payment recommended is $36,000. Thus, the debt:equity would be $324,000:$36,000, which simplified is 9:1 (MUCH better).

If you have any questions about this economic or financial stuff, just write them below and I'll field them as they come. Other than that, I'd also like to know what you think about extending skepticism to the areas it usually does not touch - such as economics.




Don said...

Just to comment briefly, excellent idea and I look forward to any posts you make regarding economics.


Eric G. said...

I too would be interested in investigating economics. I do not have much interest in economics before but with the whole economy recession thing going on currently along with Madoff and his 50 billion dollar ripoff I feel it is worth investigating practices and how the economy works. I feel as though a lot of it has to do with psychology. I mean how many people understand what the stimulus is suppose to do, in theory and in practice? Is it legit?

It seems as though the business of business is designed around greed and deception,at least to some extent considering you want to make money and profit. Here I feel as though psychology comes into play and false claims and half truths are used to fool people in order for profit.

Like I said, I don't pay much attention to the economy but it does seem like something to look into.

Andres said...

Great post, and I completely agree with you, more skeptics should add economics to their repertoire, I know I personally should.

I tend to stay away from economics debates, as I'm perfectly aware of how ignorant I am on how the market really works, so I tend to simply read and stay in the sidelines.

Thankfully though, some skeptics like Shermer have tackled some of these economic issues, as well as the new Skeptic issue has a whole section on these ponzi schemes, etc.

Overall, not much I can add to this, great post.

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