Friday 30 August 2019

Re. my Sky Package

Because your satellite service is so lunatically intermittent in transmission
Moon, I write to you to, forthwith, cancel my subscription
Yet, thy single channel being so Black & White & bereft of Life
It usurps the Sky package I purchased divorcing my wife.

Thursday 29 August 2019

Amartya Sen on the aggregation of interests and judgments

Personal Choice is about outcomes determined by your own tastes and values which in turn depend on your own knowledge of yourself and your circumstances.

 Social Choice is about outcomes determined by what we as a Society value or consider normative or necessary or advantageous under the circumstances.

Neither are arrived by 'aggregating' anything though, no doubt, totals of some type weigh upon decisions. Thus, I add up my expenditure and check if my income covers it and Society, too, needs to do something similar.

Speaking loosely, we do sometimes say things like 'I can't go to the pub with you tonight coz I'm overdrawn' or 'the Government can't cut taxes because the deficit is too large'. However, other people will point out that you can go to the pub if only you didn't insist on taking taxis everywhere. Get a bus like a normal person. Similarly, the Government could cut taxes if it didn't keep pissing money up the wall on all sorts of boondoggle.

If actual Choices, we as a Society made, could be resolved by 'aggregating' things then we should leave things to stick-up-their butt Accountants who follow rigid rules. The Greek word 'Akrebia' captures this sort of rigid thinking. Its opposite is 'Economia' which means discretionary accommodation of an imaginative, creative, sort.

Sadly, Academic Economics, thanks to the Cowles Commission & the RAND Corporation, got saddled an Arrowvian 'Social Choice theory' which wasn't about Social Choice at all. It was about pretending that markets were a type of voting mechanism and voting mechanisms were a type of auction whereby judgments were given on the basis of which side put together more money to bribe the judge. In other words, this theory took a metaphor- viz. that markets were places where people voted with their money- and treated it as a fact about the world. But, the metaphor was misleading. Markets are based on expectations regarding what is exchangeable and they can operate without money. Similarly, where there is free entry and exit- i.e. no coercion- there would be no need for voting. But, already, the metaphor has stretched too thin. Any type of behavior could be described as voting- my teeth just voted to get brushed because of their preference to be clean- with the exception of actual voting which does not correspond to voting according to the preferences the theory imputes to me because it is perfectly possible for me to misread the ballot paper and tick the wrong box, or else to fall for false propaganda or be constrained by a cognitive bias or mimetic effect. One may say that counting votes ought to be like aggregating preferences but an ought is not an is. Indeed an imperative statement may have no alethic correlative. It may be wholly incompossible with our lived world.

In a 1977 paper, Amartya Sen nicely summarizes why, by focusing on aggregation, this was a Theory that forbade itself any subject matter whatsoever in advance. This is because individual preferences are connected to Social choice in two very different ways, neither of which is additive- in some matters it is advantageous for everyone to want the same thing and it doesn't matter whether the majority's preference is respected- we can call this a coordination game- but there are other situations where this would be catastrophic. It is better that everybody 'does their own thing'- in which case no solution is focal- or, alternatively, there is a 'separating equilibrium' with a 'costly' signal which some must acquire. These situations can be said to involve 'discoordination games'.

Even with 'coordination games'- like having a rule re. which side of the road to drive on, there are situations where the choice is not binding. On a lonely, potholed, country lane everybody drives in the middle. But this 'eusocial' because having lower average speed in such contexts is beneficial for all sorts of idiographic reasons. There are also matters where everybody wants the same thing but prefers to have a leader who is known to prefer that thing even more passionately but won't deliver it at all. The more the leader does not deliver, the more fervently he is adored. Why? Preferences have an alethic component which may conflict with the imperative component for a perfectly rational reason. We participate in coordination games but hedge on discoordination games. There is 'cheap talk' with respect to a pooling equilibrium but there is also a potential separating equilibrium whose 'costly signal' becomes cheaper as a result. The fog of uncertainty is all pervasive. That risk is a priori calculable is a mirage.

Suppose Uncertainty did not exist- we knew every possible configuration of the world and its likelihood- then some aggregation mechanism must yield omniscience. If it is deterministic, then it is just a matter of time and computing power before we could compute the 'right' thing to do for Society. But this would also mean we would know the right theory of Physics and Biology and Chemistry and Mathematics. But our present knowledge of that last prevents us entertaining any such possibility.

 If the aggregation mechanism is non deterministic, there is lower likelihood that it could involve 'Common Knowledge'. But, if 'oracles' exist, who is to say some Dictator or Cult leader is not to be unquestionably obeyed? Her claim to know what's best and true may be true. Our claim that she must be a charlatan must itself be irrational There is no known method to rule out the possibility that she possesses the charismatic gifts she claims. Even if she is a fraud, we can't generalize to the class she represents. Just because I am not in fact, as I claim, a Chidambaram look-alike gigolo catering to young Bollywood actresses, this does not mean there are no such gigolos who are doing very well for themselves financially. Why else would I make such a claim? Thus exposing me as a fraud merely means you have to look harder for the real cheez till, in a plot twist nobody didn't see coming, P. Chidambaram is revealed to himself have been that gigolo- thus explaining any disproportionate assets his family may have acquired.

On the other hand, if you don't believe Chidu really engaged in prostitution because he could earn more as a very senior lawyer, you do have good reason not to bother with this line of inquiry. This is because we judge a knowledge claim by looking at its plausibility with respect to its underlying structural causal model. This is closely linked to seeing whether it can do something useful for us. In this case, you can actually hire Chidu for legal advice in a difficult case. You probably can't book him for a hen party or get him to shoot a porn movie.

Most people have quite a good implicit 'Social Choice theory' because Man is a Social Animal. We constantly made decisions on the basis not of personal but collective considerations. Moreover, we can update our information set and change our tactics very efficiently and quickly. We can't say how we do this with any great precision of language, but as Aristotle pointed out, it would be a mistake to seek for 'Akrebia' in a context where precision is neither possible nor advisable. Instead, 'economia'- a pragmatics of gesture and reciprocity- is called for. This can be very useful but it may not provide much grist for an academic mill.

This is where Amartya Sen and his ilk fell down.

The problem here is that there is no 'aggregation' going on here at all. An Accountant or Actuary may do something of that nature. Committees don't unless they are actually just window dressing for a hierarchical, or otherwise protocol bound, command structure.

Under certainty, a Social welfare judgement is aggregation, true enough if everything is common knowledge. But if certainty exists, there is no need for any one actually doing so to feel they were themselves actually judging anything. Anyway, the thing itself would be 'Common Knowledge.

Only if they were using a cardinal measure of utility and doing 'interpersonal' comparisons could this be said to occur. But how is one to prove what one is doing 'Social' rather than idiosyncratic? Who, being aggrieved at your finding, will believe what you did was sufficiently informed and objective to qualify as a judgment?

This is not to say a metric might not be useful if it corresponds to the reduced form of a Structural Causal Model- e.g. National Income statistics based on how much people earn or measures of Homelessness based on how many people are carrying their belongings around in plastic bags and sleeping on park benches. Why are such metrics useful? It's because when you do something designed to boost earnings or put roofs over peoples' heads, then you can see whether you are on the right track. Suppose what you did spend all your money on setting up committees, then, chances are, you didn't really achieve anything at all. This is also true of spending money on the 'theory' of something you don't understand, but everybody else does.

Consider the following-
Committees don't aggregate 'views'. They are supposed to deliberate in a rational manner such that 'views' yield to 'news'- learning new facts changes what they consider to be the right thing to do. Still, so long as Knightian Uncertainty obtains, 'guesswork' is the best either a committee or a savant or a protocol bound decision process can do because nobody knows all possible states of the world. There is no real distinction between a committee creating a cardinal Social Welfare function and its arising in some other way- e.g. as the output of a computer.  After all, a committee could delegate such computation to an Expert or a competent Agency. Still, preference revelation problems remain whether one is taking an opinion poll or it is a committee member voting tactically or making a disingenuous argument or seeking to make the decision space multi-dimensional so that McKelvey chaos prevails and agenda control has salience.

Let us now consider Sen's 4 'categories'. If Interests are independent of Judgments then interested judgments exist. Equally, self-interest may be modified by the faculty of judgment. How is one to 'factorize' interests and judgments which may be intermingled at a very deep level in one's psyche? Indeed, if we evolved by natural selection, why would we have independent interests and judgments? Kin-selection? But that is a bias. Indeed, there must be something we are doing which is in our interest even at the moment we make a judgment. Even our species most extreme examples of self-sacrifice are self-interested with respect to maintaining the kind of environment in which beings of our kind can thrive.

Turning to the other type of distinction Sen introduces, we must ask what is the difference between a 'decision' and a 'judgment'? Can there be an intention to judge something without that judgment becoming a ratio for a decision? How can we tell if this is a genuine intention and not hypocrisy simply? Indeed, might it not be something worse? Suppose you contact me and ask to talk to me about the difficulties I face as a Chidambaram look-alike gigolo. You mention that you are concerned with gender inequality in the sex trade. I pour my heart out to you describing my fruitless attempts to find a pimp. Having heard my tale of rejection and hearbreak, you pronounce me the wretchedest wannabe sex-worker you have encountered. I then ask what affirmative action this entitles me to? Your reply is that you don't know and don't care. Decisions of that sort are made- if they are made at all- by somebody else. Your only interest is in judging people. I then beat the shit out of you and get arrested but, coz I represent myself, pretending to be Chidu, the Supreme Court gives me interim protection.

Sen's conclusion is that the classic approach pioneered by Arrow is inadequate to show any 'impossibility result' for interest aggregation but okay for judgement aggregation though less so for judgment decisions. However, if people were genuinely interested in judgment then the impossibility result reappears for interest aggregation. Thus, either Sen is talking worthless shite, or else he has proved that it is impossible to be rational and also interested in justice. This is the opposite of his fundamental assumption in his 'A theory of Justice'.

Did Sen & his ilk have to be such utter fuckwits? Look at Taiwan. In '58, their mathematical economists- people like Sho-Chieh Tsiang & Ta-Chung Liu- convinced Li Kwoh-ting to go for export led growth while India, which had economists of comparable- or greater- stature was doubling down on import substitution and capital-intensive 'turnpike' strategies. South Korea, a little later, took the advise of Irma Adelman and began its spectacular rise. Why did India embrace an obviously stupid course of action? The answer, I think, is that Taiwan & South Korea and even Singapore faced an external threat. They had conscription. The National interest was also the individual's interest because if the enemy prevailed everybody would be worse off. India, on the other hand- long protected by the British and a starving shithole subsequently was coveted by nobody. In vain had Niradh Chaudri pleaded, in his 'autobiography of an unknown Indian', with the White Man to come back. Smart people- and the Bengali buddhijivi has a great belief in his own brilliance- thought they'd be better off as compradors to some new Imperial Master. But there were no takers for the White Man's burden. Nationalism had been a bad bet. Henceforth, the smart Bengali would be anti-national, not in the old fashioned Niradh Babu manner but by pretending to battle Fascism or Nazism or the Spanish Inquisition or, if that failed, Poverty, or Hunger or some other such abstraction best combated on an Ivy League campus.

Amartya Sen on 'divisiveness'

Amartya Sen comes from East Bengal. Because it had a Muslim majority it separated from the Hindu majority part of Bengal and joined what is now the Islamic Republic of Pakistan. The proportion of the population which was non-Muslim plummeted decade after decade because of incessant violence and persectution. By contrast, Muslims who left Hindu majority West Bengal did so for economic reasons. At least that is the testimony of Bangladeshi writer, K.Anis Ahmed writing in the New York Times. 

Bengalis were in the majority in undivided Pakistan. Once free elections were held, a Bengali would have become Prime Minister. To avoid this outcome the Pakistani Army unleashed genocide. India assisted Bangladesh in becoming independent. However, it soon dropped any pretense of being 'Secular'. Islam is the state religion. The non-Muslim percentage of the population continues to drop.

What lesson would a Hindu from East Bengal draw from its history? Surely, it can only be that Democracy means majority rule. If that majority is Muslim then non-Muslims get short shrift. This is not necessarily the case if the majority is Hindu. The proportion of Muslims in India has tended to increase or remain stable. However, Pakistan uses religion to motivate terrorists to strike against India. This can be justified by the notion that a Muslim has a duty to side with Islamic countries even if he resides in 'Dar ul Harb'.
Thus, it makes sense for India to take a tough line with extremists and criminal elements in Muslim majority districts- more particularly if they are contiguous with a Muslim majority country.

Amartya Sen takes a different view. On the website 'Newsclick' Sandip Chakraborty reports-
Expressing concern over the current hegemonic politics of “divisiveness” in the country, Nobel Laureate Amartya Sen on Wednesday said: “Democracy is not a majoritarian exercise”, adding that “winning one election does not guarantee that you can bulldoze all the pluralism in society.”
This flies in the face of facts. If Democracy were not a majoritarian exercise, East Bengal would never have separated from West Bengal nor would East Pakistan have separated from West Pakistan.

The outcomes of single elections determined both partitions of Sen's ancestral homeland. It is true that elections don't by themselves 'bulldoze pluralism'. Killing, raping and looting too is required so as to bring about genocide or ethnic cleansing.
Sen was delivering a lecture on “On Being a Bengali” to a packed auditorium at the Institute of Development Studies, Kolkata, as part of the Foundation Day programme of the research institute.
Sen's audience knew very well that Hindus in East Bengal got short shrift. They could see with their own eyes that Hindus in West Bengal felt insecure because of changing demographics. The result was that the BJP had doubled its vote share to 40 percent in the National elections.
Ruing over the recent diminished influence of the Left, especially the Communist Party of India (Marxist) in West Bengal, Sen attributed it as one of the reasons for the spurt in communal polarisation in the state.
Wonderful! If people got tired of Communist goons beating and raping them and grabbing their land, this was because of those nasty Hindus. But, if they got tired of Mamta Bannerjee's goons beating and raping them and swindling them of their money, that too was the fault of those nasty Hindu chauvinists.
He also attributed majoritarianism, as being practiced in current politics, be it in West Bengal by the Trinamool Congress and the Bharatiya Janata Party at the Centre, as the cause of the “diminished space for people and pluralistic opinion of society”.
In a Democracy, the majority decides things. Majoritarianism is the result of the practice of holding Democratic elections. True, a politician could say one thing to the majority to get elected but then do something else altogether. However, that politician is likely to be turfed out next time round. Thus Democratic practice will, as a 'repeated game', yield Majoritarian outcomes. It seems, in the Indian subcontinent, if Muslims are in the majority, non-Muslims will get short shrift. That is why Hindus don't try to emigrate to Pakistan or Bangladesh even if their ancestral homes are in those countries.
Remarking on the weaning (I presume this should be 'waning') away of “reason” as one sign of the advent of fascist ideology, Sen implored everyone in the audience to watch a film called, Reason, by Anand Patawardhan, whom he referred to as an “able filmmaker from our Shantiniketan.
Why watch it? It is old hat. The stupid people who are supposed to buy into this stupid shite aren't so stupid as to change their vote on the basis of this nonsense.
He also attributed the “withering away of ‘reason’ “as the sole cause of the devastating communal riot during the 1940s in Bengal.”
How idiotic! The communal riots of the '40s in Bengal were highly rational and had an economic motivation. Shurawardy's 'Direct Action Day' was about determining whether Calcutta would go to Pakistan or stay with India. Non-Bengali Hindus, Marwaris, Biharis, Sikhs etc. defended their economic interests in the city by killing more Muslims than the Muslims were able to kill. Once it was clear who had won, Shurawardy joined hands with Mahatma Gandhi to put an end to the violence. Since nobody would get paid for knifing anybody, all the thugs gave up communal violence to concentrate on stuff that paid better. This was pure economic rationality- which is why Sen does not understand it.
The gathering was attended by the who’s who of art, science and culture, such as economists Amiyo Bagchi, Achin Chakraborty, Jean Dreze, actor Sharmila Tagore, former state finance minister Ashim Dasgupta, historian Atish Dasgupta, among others.
Sharmila Tagore was a great actress who converted to Islam. The rest are worthless.
Sounding a subtle warning on the advent of fascism in India, the Nobel Laureate spoke of his father-in-law who he said was killed by Italian fascists. He narrated a story of “a socialist in the 1930s in Italy, who was pestered to join the fascist party of Mussolini, by the Fascist Party members. When he refused to do so, saying that his father, grandfather had all been socialists, the Fascist Party leader asked as to what he would have done had his father and grandfather been murderers. To this, the committed socialist activist replied, that in that case, he would surely join the Fascist Party.”
How did the Fascist Party gain power? The answer is that the Anarchists and Commies and other such nutjobs were running amok. Mussolini was a Socialist who had supported the War. His 'black shirts'- many of them demobbed soldiers- were prepared to do what the Police and Army would not- viz. beat the shit out of the Commies in the streets the way the TMC goons beat the shit out of the Commies's goons in West Bengal.  Incidentally, the TMC morphed out of the Congress goons who used to fight Commie goons in the streets.

Fascism got into power by beating people and stayed in power the same way. Mussolini was considered a great man. He helped Franco kill and rape his way through Republican Spain. Unlike Franco, Mussolini lost a war and was hanged.
Sen said fascist forces take the garb of social work, like the Fascist Party in Italy did which claimed that they were fighting to eradicate malaria from Italy. Under this garb, they spread hatred in society, he added.
This is utterly foolish. The Italian Dept. of Health made the plan to drain the Pontine Marshes in 1922. It had nothing to do with the Black Shirts. Later, in 1928, Mussolini, who was firmly in power, backed it on the basis of a pilot project. He then took all the credit. Sen, senile old fool that he is, thinks that Mussolini first invented a story about malaria and then started draining the Pontine Marshes so as to spread hatred in society.
Tracing the route of the syncretic culture associated with Bengal, Sen said even after the Buddhist era in Bengal, there had been violence.
So, he believes his audience is foolish enough to believe that some Religion can banish violence.
Quoting from Sahajiya sect of Buddhism as present in the Charyapad , the oldest Bengali written literary work, and Chandimangal of Mukundadas , he explained how syncretism had always been the backbone of Bengal’s evolution.
Very true! That is why Bangladesh's official religion is a mixture of Shinto and Voodoo.
He also pointed out that Chandimangal, the famous Bengali epic, wholeheartedly welcomed the influx of Muslim populace from the West.
No doubt, it would also have welcomed the influx of British populace from the West and Japanese populace from the East. Why not simply offer up every bunghole in Bengal to influxes of sodomites from around the globe?
In lighter vein, Sen related a conversation that he heard from his maternal grandfather, Kshitimohan Sen, (a doyen of Bengali Literature and a close associate of Rabindranath Tagore), that in his village in Dhaka Bikrampur’s Sonagaon village, where he resided years ago, there was an open-hearted maulvi (Muslim cleric) who, upon seeing a prominent Hindu resident, invited him for a cup of tea. When both of them were drinking tea, a Hindu priest was passing by, who, when invited to join the duo, declined stating that he was a ‘pious Hindu priest’ (Chakraborty), and could not do so. The maulvi laughed and told him that “both are the same, as one fleeces innocent Muslim population in the name of Allah, and other does the same in the name of Bhagaban (God).”
Sen should know that back then orthodox Hindus avoided tea and coffee. Tagore makes frequent mention of this.
Hindu priests were very poor. Whatever swindling they were doing was on a very small scale. By contrast, the fleecing which the Communists did made their nephews very rich.
Sen also commented on the rise of identity politics in the name of religion, which was giving rise to the “cultivation of dissonance and hatred”. He traced the roots of the present Bengali calendar as the proof of Mughal emperor Akbar’s syncretic calendar that he introduced by taking inputs from the Hindu Solar calendar and the Muslim Hijli calendar. Though Akbar’s own court members did not accept this, Akbar’s calendar was successfully introduced in his newly acquired province of Bengal.
All this is nonsense. Akbar was a King. Kings need money- i.e. efficient tax collection. A lunar calendar is unhelpful in an agricultural country. Still, for religious reasons, it had to be retained. A Persian polymath figured out a way to reconcile solar and lunar calendars. As a matter of administrative convenience traditional names were retained. What was objectionable about this new calendar was its claim to be Godly. Thus it was abandoned for the same reason that 'sajda' to the throne was abandoned.
The Nobel Laureate also pointed out that the British rulers had given rise to communal feelings out of their own interest, and in the Permanent Settlement, they gave land to Hindu landholders though during the Sultanate Period and the Nawab era, they did not try do the same for the Muslim community.
This is brazen mendacity. The British rulers wanted to make as much money as possible. Zamindars who couldn't pay were deprived of their estates. If a Hindu was better able to squeeze the tenants while paying off the Brits, his Estate increased. No doubt, the Bengali Hindu- whom the Brits considered cowardly- was more trusted not to rebel. However, for that very reason, there was no reason to 'divide and rule' given that the conquest of Bengal had been so easy.

Perhaps Sen believes that the Brits also divided Pakistan or, maybe, he blames the Americans.
He also traced that the earliest works of translating the Hindu epics, Ramayana and Mahabharata, into Bengali was commissioned by the then Muslim rulers in Bengal, adding that the last independent Nawab of Bengal, Sirajuddaulah’s core team consisted of four Hindus and two from his own religion.
What point is Sen making? The fact is the Muslim rulers of Bengal proved incompetent in fighting off Mughals, Marathas and even the tiny forces commanded by John Company. Clearly 'core teams' consisting of 'four Hindus and two Muslims' are utterly crap. What matters is having one good General and troops who won't run away from a numerically much inferior enemy.
“In fact, Qazi Nazrul Islam’s poems are the most popular Bengali verses after Tagore,” he said, adding that the renowned poet pioneered socialist thoughts and used to write for Langol, a mouthpiece of communists, and had also translated the biography of Karl Marx into to Bengali.
Once again, one wonders why Sen would make such a foolish point. Is he saying Bengali culture peaked before he was born and has been in decline ever since? Tagore is a boring and vacuous poet though, in translation, this is not always apparent. Nazrul is wholly provincial. A 'biography of Karl Marx' is difficult to write- one would need to know a great deal about German philosophy and French Revolutionary politics and English empirical economic history. There may be some biographies of Marx which score well in one or other of these areas. What is certain is that whatever it was that Nazrul translated into Bengali was puerile shite.

Sen is a highly divisive figure. When he became Chancellor of Nalanda, he said it would be 'firmly against divisiveness'. Yet he himself, by making absurd demands for 'diplomatic immunity' for its staff (including Indian nationals) completely divided the UPA Cabinet. Pranab Mukherjee, a fellow Bengali, felt he had to cut Sen down to size despite the strong support he got from the PMO after he appointed the PM's daughters' chums to lucrative posts.

Sunday 25 August 2019

Amartya Sen on why India lags China

Amartya Sen wrote an op ed in 2013 titled 'Why India trails China'.
MODERN India is, in many ways, a success. Its claim to be the world’s largest democracy is not hollow.
What is important about India is that it is a Democracy under the Rule of Law where the State can't coerce its citizens to relocate and take jobs they don't want to do. China has always used coercion. This is now blindingly obvious. It is 're-educating' millions of Uighur Muslims. It is forcing Business Enterprises to do whatever the Party demands. It has a 'Leader for Life' with unlimited powers. There is no pretense that the Judiciary can act as a check upon the Supreme Leader.

The Chinese State's ability to mobilize resources and bring about demographic change by naked coercion has no parallel in India. Thus it is foolish to compare the two countries.

At one time, there were Communist Parties in India but their 'long march through the Institutions' had already ended in irrelevance. Thus not only was India nothing like China, there was no longer any prospect of it becoming so.

The hope that India might overtake China one day in economic growth now seems a distant one. But that comparison is not what should worry Indians most. The far greater gap between India and China is in the provision of essential public services — a failing that depresses living standards and is a persistent drag on growth.
Sen has been saying this for decades. Yet everybody already knew that teachers and Doctors and so forth won't relocate to rural areas where there no amenities and their lives are unsafe. China could coerce educated people to go to the villages. It could beat students till they stopped protesting stuff and got down to work. India couldn't and can't do anything similar. Still, where there is community support for Education and Healthcare- i.e. doctors aren't tied up and forced to watch their wives being gang-raped, as happened recently near Nalanda- India can do as well, or better, than China.

Why could China exert coercive force in internal matters while India could not? The answer is that the Communist Party of China first conquered the country and then administered it. In India, the Congress Party inherited a relatively weak administration from a relatively tolerant and laissez faire Colonial power.

One reason inequality in India declined more than China is because mobility was greater. People could move freely and change occupation. This ability was limited in China. However, the Chinese leadership was able to use up the huge pent up demand for mobility to make a huge profit for itself. It turned out, preventing people from running away from poverty paid less than letting them generate a profit for you and your chums. India can still do this but faces the problem of 'contested rent seeking'. In China, this problem is settled by a bullet to the head for which your heirs are invoiced.
Inequality is high in both countries, but China has done far more than India to raise life expectancy, expand general education and secure health care for its people.
It has done so by beating and killing them if they didn't do what the Party commanded. Sometimes this raised life expectancy and general education and so forth. Sometimes it had the opposite effect. What mattered was the whim of the High Command.
India has elite schools of varying degrees of excellence for the privileged, but among all Indians 7 or older, nearly one in every five males and one in every three females are illiterate.
Elite schools can turn to shit if they hire illiterate people with political connections and admit only the non privileged- i.e. equally illiterate folk. Schools which wish to remain elite have to go out of their way to give scholarships to smart but poor kids who will work their butts off and add lusture to their alma maters.

In China, a particular Political Party decides who is privileged. It can change its mind and put a bullet in your head. The suggestio falsi here is that India can choose to do more for the non-privileged. China could do so because it shot a lot of the formerly privileged.
And most schools are of low quality; less than half the children can divide 20 by 5, even after four years of schooling.
Why? Teachers in Government Schools count the votes at elections. Anyway, who will replace them?
India may be the world’s largest producer of generic medicine, but its health care system is an unregulated mess.
But, if it were regulated, it would be an even worse mess with higher prices because of corruption. Look at Medical Education. On paper, it is highly regulated. Yet scams like Vyapam are routine. It is cheaper for Indians to study medicine in China than to qualify in their own country. Govt. policy- the 'NEET mess'- has worsened the problem.
The poor have to rely on low-quality — and sometimes exploitative — private medical care, because there isn’t enough decent public care.
The reason it isn't decent is because it is public sector. Everybody knows how things can be improved- get rid of regulations and pay for results
While China devotes 2.7 percent of its gross domestic product to government spending on health care, India allots 1.2 percent.
Dr. Jack Prager has explained why that 1.2 percent is largely wasted. He was accused of being a Christian Missionary- by Christian Missionary organizations whose malpractices he exposed!- and threatened repeatedly with deportation.

The reason there is no political constituency for increasing spending on Health and Education is because people believe the money will be wasted.

India’s underperformance can be traced to a failure to learn from the examples of so-called Asian economic development, in which rapid expansion of human capability is both a goal in itself and an integral element in achieving rapid growth.
Nonsense! It can be traced to a foolish 'export pessimism' which led to 'import substitution' based policies. This was the infamous 'License Raj'. Regulations are not a panacea. Nor is expanding the Public Sector. The reasons for this have been well understood since the Sixties. Nevertheless, 'public intellectuals' like to virtue signal on this issue by turning a blind eye to the obvious.
Japan pioneered that approach, starting after the Meiji Restoration in 1868, when it resolved to achieve a fully literate society within a few decades.
Japan embraced export led growth while also harboring Imperialist designs on their neighbors. Thus, there was a need for a literate soldiery and workforce.  However, it should be remembered, the 'terakoya' Temple schools had already raised literacy and this was itself a factor in bringing about the Meiji Restoration which ended feudalism. India had no similar convulsion. There has been incremental change and former 'feudal' landlords no longer possess the same sort of power. But, in places, they have been replaced by crime-lords like the infamous Kuldeep Sengar.
As Kido Takayoshi, a leader of that reform, explained: “Our people are no different from the Americans or Europeans of today; it is all a matter of education or lack of education.” Through investments in education and health care, Japan simultaneously enhanced living standards and labor productivity — the government collaborating with the market.
Takoyoshi was a samurai indoctrinated in the bunbu (training in literacy and martial arts) tradition. His visit to the West convinced him that Japan needed to modernize so as to change its martial tradition and military doctrine. He was not speaking of cosseting the Japanese people but rather of boosting their productivity. Why? He wanted Japan to compete on a global basis. This meant Trade, not Autarky.  Moreover, the decree on universal education was immediately followed by one on conscription. Thus people had to pay the school fees for their sons to be turned into more useful soldiers. It was not till the patriotic fervor which swept the nation during the war with Russia that school attendance became genuinely universal. Moreover, the kids actually wanted to learn. Thus by the time they came of age, illiteracy had vanished. This shows the tight connection between education and military strength- which, contra Sen, is something people actually want. This is the explanation for the growth of the 'Tigers'. Each such country wished, often for very good reason, to be militarily stronger.

 As a recent paper reveals-

Sen does not see that there is a direct connection between Japan's educational policies and its turn to militaristic Imperialism. For him 'Japan's war years' were some sort of unexpected, inexplicable, 'catastrophe'.
Despite the catastrophe of Japan’s war years, the lessons of its development experience remained and were followed, in the postwar period, by South Korea, Taiwan, Singapore and other economies in East Asia.
Yes. Export led growth was the key. Indeed, if like South Korea, Taiwan or Singapore, you were menaced by a militarily stronger nation, your survival as a nation depended on generating the wealth needed for a deterrent effect. All the countries Sen names have compulsory military service.

What did Japan's 'export led' strategy consist of? It meant getting young rural women into the dormitories of textile factories and then using the profits to invest in R& D and work your way up the value chain. South Korea was still quite poor when it decided to get into ship-building. Within a decade it had outstripped Britain.

What did India do? The idiots at the Planning Commission hobbled the textile and other wage-good industries. They babbled mathematical nonsense about 'turnpike theorems'- i.e. the notion that if you are poor, you must first get a yacht and a mansion in Mayfair before you can become rich. If you concentrate on getting ahead through thrift and enterprise then you are a fool. You don't understand mathematics.
China, which during the Mao era made advances in land reform and basic education and health care, embarked on market reforms in the early 1980s; its huge success changed the shape of the world economy.
China made 'advances in land reform' by shooting people and taking away everybody's land. Later it sent educated people into the villages for 're-education'. What was the result? Famine. Military decline. It had to change and do sensible things otherwise it wouldn't just be the Vietnamese whupping their ass. Even the Indians would get in on the game.
India has paid inadequate attention to these lessons.
No. Indians understood that export led growth was the way to go if the aim was to make the country strong and prosperous. They knew the Licence Permit Raj was killing the honest businessman and empowering the corrupt and the criminal. People like Sen, safe in Britain or America, did not pay attention to anything because they were too busy repeating the same stupid lessons they had received at Cambridge from equally worthless cretins.
Is there a conundrum here that democratic India has done worse than China in educating its citizens and improving their health?
No. China can stop poor people having babies. India can't.  Why? Because India is democratic. China is not. It's leadership may still choose to turn it into North Korea instead of South Korea. Let's hope not.
Perhaps, but the puzzle need not be a brainteaser. Democratic participation, free expression and rule of law are largely realities in India, and still largely aspirations in China. India has not had a famine since independence, while China had the largest famine in recorded history, from 1958 to 1961, when Mao’s disastrous Great Leap Forward killed some 30 million people. Nevertheless, using democratic means to remedy endemic problems — chronic undernourishment, a disorganized medical system or dysfunctional school systems — demands sustained deliberation, political engagement, media coverage, popular pressure.
Sadly this is not the case. The 'sustained deliberations' of people like Sen was useless. So was the 'political engagement' of the bien pensant. Media coverage changed nothing because the problems were 'Common Knowledge'. Popular pressure- like that of the anti-corruption movement which gave rise to the Aam Aadmi party- is just musical chairs on a sinking Titanic.

Does this mean there are no 'democratic means' to tackling India's problems? Not at all. You can have meritocratic, cadre based, not dynastic, political parties which compete on 'last mile delivery'. Furthermore, making the police and other investigative agencies autonomous will go a long way to breaking the nexus between crime and politics. There are legal remedies to existing problems. However, constantly passing new laws and making new regulations worsens the underlying problem. The courts are clogged up with law suits brought by Departments of Government against each other. Everything is always 'sub judice' and thus politicians get to pass the buck. There is no Governance just a lot of speechifying and virtue signalling from cretins like Amartya Sen.
In short, more democratic process, not less.
This means the disintermediation of public intellectuals who haven't won elections though they award each other prizes and honorary Doctorates in plenty.
In China, decision making takes place at the top. The country’s leaders are skeptical, if not hostile, with regard to the value of multiparty democracy, but they have been strongly committed to eliminating hunger, illiteracy and medical neglect, and that is enormously to their credit.
Sen, pedagogue that he is, thinks giving gold stars to pupils is the best way to change the world. But the Chinese aren't listening to him. Rahul Gandhi may have listened to him. But look where that got him.

China's leaders killed those they didn't like and rewarded those who did what they were told. Some of their leaders were crazy, some were patriots and had some common sense. China started to do well when people at the top stopped making decisions. It remains to be seen whether Chairman Xi will centralize things and whether this will destroy Chinese prosperity. What is certain is that there will be no 'convergence' between China and Liberal Democracies like India. Party control of the economy has increased in China. In India, corrupt dynasts are now on the run.
There are inevitable fragilities in a nondemocratic system because mistakes are hard to correct.
Nonsense! Mistakes can be corrected immediately by shooting a few people and doing a 180 degree turn. The Leader can say that his previous pronouncement that cats, now cows, must produce milk for the dairy industry actually meant that cats are cows and say moo not miaow.
Dissent is dangerous. There is little recourse for victims of injustice. Edicts like the one-child policy can be very harsh. Still, China’s present leaders have used the basic approach of accelerating development by expanding human capability with great decisiveness and skill.
China's 'present leaders' have done very well for themselves. They are now ensuring that they will retain the lion's share of any future gains made by the private sector.  Sen may believe this 'expands human capability'. If so, he must think the world of capitalists who achieve the same end without using coercive means.
The case for combating debilitating inequality in India is not only a matter of social justice. Unlike India, China did not miss the huge lesson of Asian economic development, about the economic returns that come from bettering human lives, especially at the bottom of the socioeconomic pyramid.
China did not give a damn about 'bettering human lives'. That's not the reason if keeps putting bullets in people's brains. It embraced export-led growth based on private enterprise so as to enrich itself and increase its power. Under Chairman Xi, the Party's end-game has been revealed for all to see.
India’s growth and its earnings from exports have tended to depend narrowly on a few sectors, like information technology, pharmaceuticals and specialized auto parts, many of which rely on the role of highly trained personnel from the well-educated classes. For India to match China in its range of manufacturing capacity — its ability to produce gadgets of almost every kind, with increasing use of technology and better quality control — it needs a better-educated and healthier labor force at all levels of society.
Sadly being healthy and well educated does no good if nobody is buying what you are selling. Ask Rahul Gandhi.

A hefty fellow currently doing a PhD in Gramscian Grammatology at JNU may become more socially productive if employed in a call center but neither his health nor his education is germane. What is important is if that call center can compete for higher value added business on a global market.
What it needs most is more knowledge and public discussion about the nature and the huge extent of inequality and its damaging consequences, including for economic growth.
India does not need more useless junk social science masquerading as Knowledge. It is sick and tired of 'public discussion' that goes in circles. Inequality does not matter. Social Insurance- risk pooling- does. The former is not deliverable save coercively and with mischievous consequences. The latter can be the subject of 'last mile delivery' and thus impact voting preferences.

Friday 23 August 2019

Ole Peters blogging any old shite about Bernoulli

In an earlier post I explained why 'Ergodicity Economics' is shite. Today I'll dissect a blog post by its champion, Ole Peters who writes-
Not all academic fields have a clear starting point, a seminal paper that constitutes the foundation of the entire discipline. But economics does. The paper that defines modern formal economics was written by Daniel Bernoulli in 1738.
Bernoulli contributed to probability theory, statistics, and fluid dynamics. He did not contribute to Economics. Indeed, the standard models of Economics which are taught in introductory courses are deterministic and don't feature any type of Uncertainty or turbulence. Moreover, uncertainty in Econ is 'Knightian'- i.e. we don't know the underlying probability distributions or the range of possible states of the world. Failure to account for Knightian Uncertainty- for e.g. by creating what are known as 'Arrow-Debreu' securities- is to create what Warren Buffet is supposed to have called 'Financial Weapons of Mass Destruction'.

Utility theory was introduced by Jeremy Bentham in the Nineteenth Century. Utility is subject to diminishing returns just like farm land- the original paradigmatic example- in that more fertile land is used first and then subsequently less fertile land- called 'marginal' land- is brought into use at higher cost. During the course of the Nineteenth Century, as older 'Marxists' of my vintage will recall, it was discovered that this 'Physiocratic' notion of marginality was wrong. In America there was evidence that marginal land is cultivated first- indeed, a little thought will show this must be the case, while it was only later that very fertile 'bottom' land was drained and brought under the plow. Similarly, when it comes to Utility, there can be 'increasing returns' both individually and socially. There is a hilarious novel by Indra Sinha about a guy who gets addicted to 'call-up' internet chat lines in the early Nineties and goes bust coz his phone bill is through the roof. My memory is, by the time the novel came out, even poor people like me had unlimited 56k dial up internet for a small flat fee. Still, I cancelled my contract after the novelty wore off.  But within three or four years we had 'Broadband' sufficient to let me stream my Indian Music and old Bollywood films. Yet it is only now that I could be said to be addicted to the internet. Still, 'diminishing returns' haven't set in coz I watch Netflix while on the exercise machines at the gym and use Spotify while walking or jogging. Indeed, if I knew how to cook, I'd be using the internet to make my curry rather than using it to order shite 'takeaway'.

My point is that 'diminishing returns' was just propaganda. It wasn't something anyone- save some pedagogues and ideologues - took seriously. If they did, the consequences were dire.

To be useful, Utility must be transferable in at least one of its factors. Anything 'hedonic' or otherwise desirable which is wholly unfactorizable such that no transferable element obtains, is outside the scope of Economics. It may be Soteriological or Aesthetic or something wholly apophatic. But, even if it involves choice under scarcity, it isn't Economic but rather 'Akrebic'.

This isn't taught to you in Econ 101- but neither is it taught that you ought not to stick your thumb up your butt and jizz from the lectern. Rather, it is an 'unthought known'.

There have been periods when State power is highly coercive for a fiscal reason- e.g the need to finance War Debt. During such periods it makes sense for 'public intellectuals' to pretend that 'lotteries' offered by the State really are what they claim to be.  It would have been unpatriotic, or seditious, to suggest otherwise though it was also 'Common Knowledge' that such was indeed the case. However, this poses no great scandal. Nomos is Phusis within our species' quite wide margins of survival. What matters is that entry exceeds exit at those margins.

During such periods, there is a 'Straussian' element in Econ writing- i.e. patent absurdities are treated as alethic. At such times, sensible mathematical economists- like Slutsky- pretend not to be mathematical economists at all- he who could have outdone Frank Ramsey!- while some gormless math mavens seek to prove their loyalty, and utility to the High Command, by pretending that Econ is Physics. It isn't. The 'Schweinemord' is an example. If you let Statisticians in the bureaucracy kill off the pigs, coz pigs are 'co-eaters', those stupider than pigshit savants will think gas chambers a swell idea ;-more especially for that most highly productive portion of the population which doesn't even eat pork.

Still, the interessement of math mavens can be a good thing for 'Operations Research', Linear and Dynamic programming, Control Theory and so on. But there is no need for us now to pretend this shite don't stink unless we are actually employed by a Bernie Madoff and can't pay our alimony or keep out of jail any other way.

Expected utility theory is probabilistic and ignores 'Common Knowledge' coz it is either stupid or meretricious. However, because it fails to account for Knightian Uncertainty, it is obvious that its use would be highly mischievous. All this was well known by the time I started studying Econ back in the Seventies.

Peters however thinks Bernoulli invented expected utility theory and that subsequent economists like Smith, Ricardo, Marx etc had heard about him. This is wholly untrue. Bernoulli spoke of the 'emolumentum medium'- or average reward- from a gamble. A poor man would sell a lottery ticket for less than its expected value because he would feel greater regret for not doing so if he failed to win. This is not 'utility maximisation' at all. It is regret minimization. An emolument is not itself utility. I recall a friend of mine who gave up a promising career in Merchant Banking for a low paid admin job with the BBC. Why did she do so? The answer is that her goal was to write scripts and direct TV series. In those days, the Beeb promoted from within. She felt she had been given a once in a life-time opportunity to break out of her bourgeois social class and became part of the Bohemian set. She never did make it in Show Biz, but has no regrets because she felt she'd given herself a fair crack of the whip. We can't say she 'maximised her utility'- she honestly didn't know whether or not she had what it takes to succeed in the field she was attracted to. Interestingly, after marriage, when her kids started school, she went back to work for what was then the Audit Commission. I imagine she did very well when she joined the Private Sector. Thus, in the end, she probably did maximize her emoluments!

Economists with a literary bent are aware of the Epicurean School of Economics whose most famous exponent was Philodemus of Gadara whose verses were praised by Cicero for their elegant lasciviousness. 'Emolumentum' is a rather Ciceronian word. The point Cicero was making (in his diatribe against Caesar's father-in-law) was that a coarse type of hedonism defeated its own purpose. It provoked disgust. It maximised regret. To have over-eaten at a banquet where only the choicest viands were on offer is one thing. It is quite another to gorge yourself out of a restaurant garbage pail despite being as rich as Croesus.

Bernoulli, however, was not an Epicurean but, rather, addressing a current question which was essentially about explicating probability theory so it could be used in Physics and Actuarial Science and other such useful avocations. He was not looking at real world 'chrematistics' (i.e. wealth generating strategies) and thus was neglecting arbitrage on the basis of 'Common Knowledge' (this yields what is known as 'Muth Rationality' and gets rid of 'path dependence', thus establishing ergodicity).

Bernoulli says 'Until now scientists have usually rested their hypothesis on the assumption that all gains must be evaluated exclusively in terms of themselves, i.e., on the basis of their intrinsic qualities, and that these gains will always produce a utility directly proportionate to the gain.' This is true enough. I'm a very poor man. Suppose I suddenly get a lottery ticket which pays out 20,000 ducats or nothing with equal probability. What do I do? The answer is I approach rivalrous arbitrageurs and ask them to quote their 'spread' for the ticket. I use an optimal stopping rule- like in the Secretary problem. So, if I find the first three brokers quote pretty much the same spread, I chose the one I like and sell my ticket. The more 'open' and frictionless the market, the closer my 'emolumentum' is to the Expected value of the lottery.

Bernoulli was assuming 'fair games'- i.e. frictionless ones- and this is genuinely useful in some applications of math having to do with 'games against nature'. But chrematistic games don't have this quality because humans exhibit mimetic effects and have Schelling focal Common Knowledge type correlated equilibria. However, because of Knightian Uncertainty, they hedge on- even ontologically dysphoric- discoordination games. Thus General Equilibria are 'anything goes' which also explains why your and my life is so much less utterly shit than that of our ancestors.

Bernoulli says- 'Any gain must be added to the fortune previously possessed, then this sum must be raised to the power given by the number of possible ways in which the gain may be obtained; these terms should then be multiplied together. Then of this product a root must be extracted the degree of which is given by the number of all possible cases, and finally the value of the initial possessions must be subtracted therefrom; what then remains indicates the value of the risky proposition in question. This principle is essential for the measurement of the value of risky propositions in various cases.'

This is obvious nonsense. Gains can be given away or used to purchase some wholly different type of psychic benefit- e.g. public esteem, political power and so forth. What matters is if arbitrageurs exist between 'coordination' and 'discoordination' games. But why shouldn't they? Bernoulli lived in a Society where Wealth could turn into Nobility- or even Royalty- while Poverty caused loss of caste. Petronius' Trimalchio could be a Maecenas if he had better taste. But, by purchasing a sufficiency of Greek slaves, he could ensure that his heir had the right type of Paideia.

Ole Peters, being impartially ignorant of both Bernoulli's and our own epistemic mise en scene, says that Bernoulli- introduces expected utility theory. 
Surely, Bernoulli is invoking some sort of notion of diminishing returns to challenge what he believed to be the prevailing hedonic calculus? Yet, if there is Common Knowledge and arbitrage is more or less frictionless, then  the Expected Values is the 'emolumentum medium'.

Not content with telling a stupid lie, Ole Peters makes an even more ludicrous claim-

The main thrust of our work is, of course, to replace expected utility theory and instead work with time-average growth rates of wealth.
Nobody knows what is or isn't wealth. Only time will tell if an asset really is productive or if it is a white elephant. Only God knows the 'time-average growth rates of wealth'. There may be expectations of what they might be but those expectations are known to be a priori wrong because 'wealth' is defined in terms of 'income' and vice versa, with both being known- because Death exists at both the individual and the species level- to be radically uncertain and thus fundamentally unknowable save after the fact.

The 'time-average' growth rate of wealth of a Miser or a Midas or a Thief may appear high. But those fuckers die sooner rather than later and, guess what?, can't take their ill gotten gelt with them. Who doesn't know this? Only good ol' Ole Peters. What is he drinking?
  1. I’ll mention how that works, but the focus of this post will be on something else. Bernoulli’s paper is not only conceptually misleading but also technically flawed in a sneaky way that keeps confusing everyone. Where Bernoulli determines the price to be paid for a risky prospect, he contradicts himself. I wouldn’t make such a fuss about this if the paper wasn’t so absolutely crucial. This basis of economics contains an error that invalidates commonly held beliefs and puts tens of thousands of studies into a different light. I recently encouraged people, using twitter, to read the paper and see for themselves. In this blog post I go through the relevant analysis step by step and address questions that came up in response to the tweet.
Nobody read Bernoulli's paper. Nor did they read Karl Menger- coz it was his Dad who was the economist. The guy was a refugee from a shithole country who burbled shite about 'meta-economics' at a time when it was already clear that the most economical use of mathematical economists was to plug them into the most boring and tedious type of O.R coz, at best, they are a superior type of Accountant.
Still Menger's Math was good. His 'Super Petersburg paradox' is interesting because it features types of functions whose growth rates can overtake each other in non obvious way. This is useful heuristically. But, it is silly. We know that a Lottery which raises the cash prize at a faster rate than we lose interest in it is a con. Still Menger has a place in the history of mathematical economics. Sadly, mathematical economics has a place in the history of economics only as the butt of ridicule coz it shat the bed everywhere it gained currency.

Bernoulli's own view was that gambling was foolish. 'First, it appears that in many games, even those that are absolutely fair, both of the players may expect to suffer a loss; indeed this is Nature's admonition to avoid the dice altogether' However, he gave the wrong explanation for it. Replace the words 'game' and 'dice' with 'risk pooling' and 'insurance scheme' respectively and Nature's admonition would be to take even somewhat 'unfair' offers so as to create a Social Insurance safety net. This does not depend on 'cardinal utility' or 'interpersonal comparisons' or even the diminishing marginal utility of money. It is the Hannan Consistent strategy.

It is useful for Math mavens to look at the growth rate of different types of functions but such functions don't appear in Econ. That's why mathematical economists aren't running things.

Bernoulli’s paper was re-published in 1954 in Econometrica (if you don’t like paywalls, here’s a free pdf). This is the standard translation from Latin, and page numbers below refer to it. I have not read the original Latin paper, but the error is spelled out in words, visually in a figure, and also in an equation, so this is not something lost in translation. If you have a copy of the original, please send it to me. [2018-02-18 addendum: a scan of the original is here.] The paper is so fundamental to economics that more than 200 years after its publication it was fished out of the proceedings of the Papers of the Imperial Academy of Sciences in Petersburg (Vol. V, 1738, pp. 175-192), translated into English, and published in the leading journal of the field.
If it was fundamental to econ, how come no economists knew about it? Why did it have to be fished out from some archive in the Soviet Union? Back in '54, few economists read Econometrica because they didn't have the mathematical chops. It wasn't till the next decade that Harvard dropped the foreign language requirement, substituting a math requirement, for a PhD in Econ. This was a good thing coz reading German makes you stupid and evil. Doing a bit of Math just makes you a conceited prick whom any teenager can intellectually kick in the goolies coz that's how Maths works. It weeds out utter shitheads.
  1. Expected utility theory (EUT) is a form of decision theory. Imagine someone offers you a lottery ticket. Prior to Bernoulli, it was assumed that people roughly maximize the expected change in wealth resulting from such a gamble. That is, if initial wealth is and possible changes in wealth are then you’d maximize
  1. (Eq.1) .
Would you buy a lottery ticket off me? No. You'd suspect it was a scam. Indeed, sensible people don't buy lottery tickets because they are a 'tax on stupidity'.

Before and after Bernoulli, nobody bothered greatly with gambling- except gamblers. Casinos welcome punters who have devised full-proof systems to win at roulette. One may as well try and patent a permanent motion machine.

The way you maximize your wealth is not by gambling but by keeping abreast of new developments in your field and investing in promising ventures which, unlike gambling, involve 'positive sum' games- i.e. increase aggregate output.

Consider what Bernoulli himself said re. 'positive sum' games in the paper Ole Peter's relies on- .'The procedure customarily employed by merchants in the insurance of commodities transported by sea seems to merit special attention. This may again be explained by an example. Suppose Caius, a Petersburg merchant, has purchased commodities in Amsterdam which he could sell for ten thousand rubles if he had them in Petersburg. He therefore orders them to be shipped there by sea, but is in doubt whether or not to insure them. He is well aware of the fact that at this time of year of one hundred ships which sail from Amsterdam to Petersburg, five are usually lost. However, there is no insurance available below the price of eight hundred rubles a cargo, an amount which he considers outrageously high. The question is, therefore, how much wealth must Caius possess apart from the goods under consideration in order that it be sensible for him to abstain from insuring them?

This is a stupid question. If insurance premiums are indeed 'outrageously high'- i.e. yield economic rent- then there is an arbitrage opportunity. Make money of that by forming a coalition which 'internalizes externalities' and overcomes information asymmetry.

Suppose this is not possible because of the backwardness of your locale. Still, some people with little wealth should take the gamble while some with much wealth should not. Why? Because of hysteresis of a 'charismatic' sort. Venture Capitalists, following portfolio choice theory, do in fact finance young 'outsiders' who take this sort of gamble and end up hammered on 'Change. Consider what happens when Baron Rothschild takes a gamble of this sort and wins. Nobody cares. Big yawn. But if Baron Rothschild takes up the guttersnipe Schlemiel ben Schlemazel and he wins big time- then new horizons are opened up- not all purely chrematistic.

We live in a world- or at least Indians do- where Angel Investors can get a higher tax liability for doing precisely this type of arbitrage.
Bernoulli writes from the perspective of the Roman Law which defined 'culpa levis in abstracto'- or negligence with respect to the highest standard of care and diligence- with respect to the 'bonus paterfamilias'- the ideal patriarch, perhaps of Senatorial rank, with a very thorough knowledge of the world, who exercises a sort of trusteeship on behalf of his wards.

The problem here is that even by Cicero's time, financial markets had moved forward on the basis of 'Common Knowledge' type Muth Rationality. In other words, this math maven was babbling nonsense with respect to the commerce of his own time.

 If x represents his fortune, then this together with the value of the expectation of the safe arrival of his goods is given by 10(X + 101)95X5 (X + 00)'9x in case he abstains. With insurance he will have a certain fortune of x + 9200. Equating these two magnitudes we get: (x + 10000)19x = (x + 9200)20 or, approximately, x = 5043. If, therefore, Caius, apart from the expectation of receiving his commodities, possesses an amount greater than 5043 rubles he will be right in not buying insurance. If, on the contrary, his wealth is less than this amount he should insure his cargo. And if the question be asked "What minimum fortune should be possessed by the man who offers to provide this insurance in order for him to be rational in doing so?" We must answer thus: let y be his fortune, then 20 ~ ~ ~ = 2A/(y + 800)19. (y -9200)=y or approximately, y = 14243, a figure which is obtained from the foregoing without additional calculation. A man less wealthy than this would be foolish to provide the surety, but it makes sense for a wealthier man to do so. 

Nonsense! This is an arbitrage opportunity. You trade off the credibility of the surety provider against his Shapley value- i.e. you shift risk to the shoulder least able to bear it and thus with the lowest leverage in getting a bigger slice of the pie. No doubt, this may be a 'bargaining problem' rather than incomplete adhesion contract, but, if it is, the counterparty can do a deal with you to offload risk onto their more stupid counterparties. It is these sorts of processes- some mimetic, some Common Knowledge & 'Muth Rationality' based- which have permitted language to flourish as the solution to both coordination and discoordination problems. Commerce is merely a prescriptive type of language. Sure, it has a mathematical representation but only in a univalent foundations, type theoretic, protocol bound and therefore non canonical form.

Bernoulli says- From this it is clear that the introduction of this sort of insurance has been so useful since it offers advantages to all persons concerned. Similarly, had Caius been able to obtain the insurance for six hundred rubles he would have been unwise to refuse it if he possessed less than 20478 rubles, but he would have acted much too cautiously had he insured his commodities at this rate when his fortune was greater than this amount. On the other hand a man would act unadvisedly if he were to offer to sponsor this insurance for six hundred rubles when he himself possesses less than 29878 rubles. However, he would be well advised to do so if he possessed more than that amount. But no one, however rich, would be managing his affairs properly if he individually undertook the insurance for less than five hundred rubles. 

Any actual businessman could explain Bernoulli's error. Arbitrage is ubiquitous. All Enterprises are 'discovery processes'. If you find out there is an economic rent in an area you would otherwise access, form a coalition to enter that field. This is not 'Tarden mimetics'. It is Muth Rational behaviour and the reason we as a species remain unified.

Ole Peters does not understand that, for Human beings, Expectations are 'crowd sourced'. Provided arbitrage is permitted, Bernoulli & Menger & Von Neumann & Morgenstern & Arrow etc were just talking worthless shite. But everybody already knew that by the time I was in short pants and the Sonnenschien-Mantel-Debreu theorem percolated into Mathematical Econ 101. Actual Econ, didn't need it, coz it wasn't utterly shite from the get go.
  1. Here, is the expectation operator. Some people like to denote it by but it’s same thing. If is positive, you’d buy the ticket, if it’s negative, you wouldn’t. But observations soon convinced everyone that this is not how people behave.
If it were positive, the guy running the lottery will go bust. He won't be able to pay out. One may as well give Bernie Madoff your money.

This doesn't mean it is irrational to 'have a flutter' once in a way. But your bet is so small it makes no real difference. We say there is a psychic benefit- some 'utility' is gained by doing something irrational just for the thrill of it.
  1. EUT was introduced as a refinement of this decision criterion. It says that you will choose the action that maximizes the expected change, not of your wealth but of your utility. The insight here is that people don’t evaluate gambles in isolation but with respect to a reference level (their initial wealth). An extra dollar is worth less to me if I’m rich than if I’m poor. Mathematically, a so-called utility function is introduced, where represents wealth.
This is silly. Gambling has nothing to do with Economising. Sure, buying a raffle ticket once in a way may be fun but don't make a habit of it. True, a very rich man may gain more pleasure from gambling because he is the center of attention and, even if he loses, it won't make much difference to him. By contrast, the guy who is betting his last dollar is trembling with fear and may leave the table to go blow his brains out in the alley way.
  1. The most commonly used utility function is . This is motivated by assuming that the extra utility someone attaches to an extra dollar is inversely proportional to the wealth that that someone already has, 
The reason I wasn't taught this was because the thing was patently absurd. Utility has no relationship at all to wealth. It does relate to Consumption but, long term, that Consumption has to be sustainable- i.e. it shouldn't cut into one's Wealth (which is defined as the set of assets needed to generate a given level of Income. Deduct 'depreciation' of assets and you have 'Net Income'. If you want to better off in the future- or if you know a time will come when you can no longer work because you are too old or have fallen ill- then you should save and invest out of your current Income. But, you should not go to an extreme and starve yourself to death so as to hoard assets.
The 'unusual' means that which was not predicted. But man has evolved on a highly uncertain fitness landscape. Rather than gambling, one should find 'structural causal models' which don't just predict things better, thus reducing Risk, but also enable one to actually change how things are made so that everyone can have more for less effort.

Still, I suppose, historians of Economics can say 'Bernoulli anticipated the theory of diminishing marginal utility'. But such historians don't greatly matter. Nobody, but a couple of senile pedagogues, cares who has precedence in formulating a doctrine which is merely common sense.
  1. Later on Bernoulli writes this assumption as the differential equation , whose solution is the logarithm. Let’s write down what EUT wants us to maximize:
  1. (Eq.2) .
This is a silly equation. Capitalists don't stop being capitalists just because they are at the satiation point for Utility. Why? Money is 'transferable utility'. They can make more money and give it away and get a reputational benefit. Alternatively, they can advance Science or the Arts or their own political agenda. This equation is quite worthless.
  1. What’s our conceptual critique?
  1. By re-writing this object you will immediately see that it actually means something else, and that’s the essence of our conceptual critique. Logarithms turn division into subtraction, . So (Eq.2) can be re-written as
  1. (Eq.3) .
  2. Now divide both sides by
 Why bother? It is 1. It leaves the equation wholly unaltered.
  1. (Eq.4) .
  1. What’s this? In any field other than economics, this object is called the expected exponential growth rate of wealth.
That's true of the right hand side of the equation. The left hand side says that Utility is equal to it which is a foolish assumption.
  1. No utility required, no psychology required.
The assumption that utility depends on wealth is psychological.
  1. Digging just a little bit deeper, the whole story comes to light. Wealth dynamics are fundamentally multiplicative — we can invest wealth to generate more wealth.
We can also invest wealth and find we pissed it against a wall. The dynamics of Wealth are regulated by Economic constraints of a physical, not notional, type.
  1. For such dynamics the exponential growth rate is an ergodic observable, which means its expectation value tells us what happens in the long run.
Sadly, it is a difficult matter to tell a Bernie Madoff from a Warren Buffet. On paper, a fraudster's scheme may look more promising than that of a genuine Wall street wizard. 'Ergodic observables' are horseshit. We won't back the fraudster if we find out, after Googling him, that he has been accused of running scams in other towns. We will back the wizard when, like Buffet, he has a great track record and is a genuine philanthropist. 'Path dependence' matters- the fraudster's past tells us something about his future. Ergodics- i.e. the notion that the past does not matter- is just what con-men rely on to convince you they have turned over a new leaf and this time they really have found the formula to extract gold from horseshit.
  1. Mystery solved! People just optimize what happens to their wealth over time. Crucially, additive wealth changes, are not ergodic, wherefore the expectation value in (Eq.1) does NOT tell us what happens over time.
Either wealth changes or it does not. If this is determined exogenously, then ergodicity obtains. If not, then it doesn't even if you take the log of a ratio instead of the ratio itself. Thus, suppose all fund managers are equally smart and equally honest and the only thing which determines their success is exogenous factors- e.g. commodity prices, geopolitical factors etc- then expectations are ergodic. However, if some are crooks and others are honest and smart, then 'hysteresis'- i.e. path dependence will feature.

Only time will tell what happens over time because Knightian uncertainty obtains. This severely limits the application of math to Econ. Moreover, people who study Econ rather than Physics or Computer Science or Biology or whatever, end up working for those who find commercial applications for the things the Scientists and Artists and Chefs and Hairdressers discover. Economists are glorified Accountants and rank below Actuaries. Still, they can do some useful donkey work. But only if they ignore their textbooks and the dreary 'papers' published by pedagogues.
  1. Economics textbooks and papers miss this point. The problem is treated in an a-temporal space, as a so-called “one-shot game”. The mathematics is the mathematics of things happening in parallel universes, not of things happening over time.
No. The maths is the maths of a 'steady state' equilibrium of a Nineteenth Century type. It has nothing to do with 'parallel universes'. But, it is merely a pedagogic or ideological tool with little practical import.
  1. Where time is mentioned, it is usually wrongly assumed that indicates what happens over time.
No. The assumption is that it is the end state. The transition may be instantaneous, nevertheless these models are called 'one-period' economies.
  1. Endless arguments ensue over whether is the correct psychological re-weighting people apply to wealth — in reality this is a question about dynamics, with psychology as a second-order effect — of course we can be deceived, confused, or stupid and not act in our best interest.
I've known economists all my life. There has never been any such argument even among pedagogues of the obtusest sort. It is obvious that Utility is a function, not of Wealth, but Consumption.
  1. It’s also far from easy to put a number on wealth , or indeed on the different and their probabilities involved in real-world decisions.
It is impossible to do so save after the event. Nevertheless, precisely because of hysteresis, it can be quite useful to do so.
  1. The history of economics is a wonderful example of how a basic conceptual error prevents the detection of technical errors and inconsistencies.
There was no 'conceptual error'. The history of economics is the history of politics on the one hand and administration on the other. It has absolutely nothing to do with mathematics.
  1. Without the right concepts it’s just not possible to ask the right questions, let alone find consistent answers.
The right questions to ask are the one's whose answers prove useful. One does not need to have right concepts to start off with. Rather, right concepts arise out of looking at existing 'Structural Causal Models' and tinkering with them till they give superior outcomes. Understanding why the improvement has occurred represents concept formation. The 'right concept' is the one which allows the innovation to spread most rapidly and at the lowest cognitive cost.
  1. How much would I pay for a lottery ticket?
Just as much as can be justified by the thrill of buying it. But, since lotteries must be negative sum games, don't think of this as an investment or a wealth management strategy.
  1. Let’s put our conceptual troubles aside for a moment and use EUT to address precisely one of the questions Bernoulli asked. My initial wealth is , I have to pay a ticket fee , and I can win prizes with probabilities , where is a random integer denoting which of the possible prizes I win. We imagine the lottery to take a time that doesn’t depend on which prize is won.
Voltaire won a lottery which made him financially secure. But a Society which thinks lotteries are about Wealth Creation is one headed in a tumbril for the guillotine
  1. EUT says: find the value that makes the expected change in utility zero. If I pay more, the lottery will have a negative expected utility change, and EUT would advise me not to take part. Mathematically, here is the object we have to compute:
  1. (Eq.5)
  1. That’s it. Now vary so that the expected change in utility becomes zero. The value of where that happens is the maximum fee I should pay for the lottery.
  1. Bernoulli’s error
  1. Bernoulli makes an error when he talks about this fee. The key figure is on p.26, and I’ve scribbled in red a translation of Bernoulli’s notation into the symbols used in Peters and Gell-Mann (2016).

  1. Let me talk you through the figure. The horizontal axis represents wealth , and the vertical axis represents utility, so that the solid curve is the utility function .
  2. Let’s focus on the solid horizontal line first. The point B is the initial wealth . The point p, to the left of B, represents the wealth , that is, the initial wealth minus the ticket fee. The points C, D, E, F are wealth levels arrived at by adding to the initial wealth one of the possible prizes .
  3. You may already suspect the problem: let’s imagine outcome 1 occurs in the lottery, meaning we receive the prize . In that case, our wealth will change to , and not (which is the position of point C). We have to subtract the fee! The points C, D, E, F marked by Bernoulli have no relevance to the problem (unless the fee is zero).
It may be that, at the time, your stake was returned along with your winnings.

  1. Now let’s walk along the utility curve. The point o marks the utility of wealth , so that the dashed line po is the drop in utility associated with a drop in wealth from to . The points G, H, L, M (to the right of B along the utility curve) represent the utilities associated with the irrelevant wealth levels . The point O represents the expected utility assuming prizes are received with their respective probabilities but no fee is paid, p.26

  1. In Peters and Gell-Mann (2016) we call this object , for want of a better symbol.

  1. Now comes Bernoulli’s error. He claims that the lottery is to be valued by comparing to the loss in utility one would suffer if one were to buy the lottery ticket for its fee but not receive any prize. The key passage is on p.26–27

  1. This amounts to a decision criterion, different from (Eq.5) and inconsistent with EUT. We denote with the symbol what Bernoulli calls “the disutility to be suffered by losing” (Bp in his notation). Now we can write Bernoulli’s decision criterion in symbols. Bernoulli tells us to buy a ticket if the following quantity is positive, and not to buy it if it’s negative

  1. (Eq.6) .
So Bernoulli is gesturing at the common sense view that, for prudential reasons, a fall in wealth is more greatly feared than a gain is valued. So this is mere 'risk aversion' which was old hat by the time I got to College. Indeed, Econ could have abandoned Utility maximizing models for 'Hannan Consistent' type 'regret minimizing models' but it wasn't worth the bother because the thing was just a pedagogic exercise. It was already obvious that 'Decision theory' was silly. Mechanism Design was the way to go.
  1. Error or different model?
  1. In principle, one could now say that Bernoulli just had a different model of people’s behavior than does modern economics. That would be bad enough because modern economics claims that it has the same model as Bernoulli.
Why would it make any such claim? Nobody gives a shit about some dude who died a long time ago.
  1. It’s more likely that Bernoulli got confused specifically when he tried to find the maximum fee. Otherwise he seems consistent with EUT, for instance on p.24, where he describes the certain profit (“the value of the risk in question”) that corresponds to an uncertain profit

It may be that back in the Eighteenth Century, this type of Rational Analysis was something new. My understanding is that the education of young people destined for commercial careers was changing at this time. Moreover, Governments were becoming more active in developing 'Political Arithmetic' so as to expand their fiscal base and mobilize resources. However, it is scarcely earthshaking stuff. Smart businessmen had been evaluating risk successfully for millennia.
  1. Let’s really kill this. Why is (Eq.6) not a good decision criterion?
 It's coz lotteries don't matter. Buy a ticket from time to time if it gives you a thrill. But don't fool yourself you are doing 'Wealth Management'.
  1. It is easy to construct an example where the maximum fee I should pay, , is smaller than the smallest possible prize in the lottery, but the criterion still tells me to refrain from buying a ticket. That makes no sense: such a lottery has no downside risk. I’m guaranteed a positive net profit, the only uncertain element is how much better off I will be after the game. Intriguingly — have another look at the figure — the maximum fee calculated by Bernoulli is smaller than the smallest possible prize, assuming that one of the prizes will be won (the distance between B and p is smaller than the distance between B and C).
Suppose you email Ole Peters and offer him a chance to buy a ticket in a lottery for 100,000 pounds sterling. The smallest prize is one million pounds. Every ticket is guaranteed to win a prize. The largest prize is ten zillion pounds. Will Peters take it? No. He is only pretending to be stupid. Similarly, he won't queue up to by a lottery ticket costing one penny which pays out two pennies and which only permits one ticket to be sold to each customer. Why? The game is not worth the candle.

Any lottery with a positive Expected Value will crash immediately unless it stipulates only one ticket per customer and the prize is nugatory.
  1. Another problem is this: how much should I be willing to pay for one dollar, according to Bernoulli? What? … for one dollar? One dollar, of course! Yes, but not according to Bernoulli. Try it out: for any non-zero number of dollars I buy in dollars, due to the concavity of the utility function. Therefore, Bernoulli’s criterion tells me that no amount of money is worth that amount of money. Come on! That’s nonsense!
Is it though? Suppose I put an ad in the papers offering two dollars for every dollar mailed to me. By the time I'm arrested I'd have collected only a few hundred dollars because the vast majority of people aren't utterly stupid.
  1. Bernoulli in practice
  2. Later, on p.33, Bernoulli works through the specific case of the St. Petersburg lottery. This lottery is defined by and , with any positive integer.
The point about the St. Petersburg lottery is it shows that 'chrematistics' (the science of wealth) is as foolish as everybody from the time of Aristotle had said it was. Wealth can go to infinity though Output can't in the same way that Alchemy can turn lead into gold but Chemistry can't.
  1. But his method is so nonsensical that he does something really curious. He wants to evaluate his criterion (Eq.6) but realizes that that’s cumbersome. He then says that if wealth is very large and the utility function can be considered linear, his criterion can be approximated by (Eq.5), meaning actual EUT. So he uses actual EUT as an approximation:

  1. Bernoulli’s notation is different from ours ( is initial wealth (whereas we use ) and is the fee (whereas we use )). Let’s put this back into our notation and show that he really is using criterion (Eq.5) and not his own criterion (Eq.6).
  1. (Eq.7)
  1. …take the logarithm

  1. (Eq.8)

  2. …simplify…

  1. (Eq.9)

  1. …simplify even more and subtract

  1. (Eq.10) .

  1. This sets the expected change in logarithmic utility to zero, to determine the maximum fee I should pay, as required by EUT. Bernoulli does not use his own criterion (Eq.6) but the generally accepted criterion (Eq.5).

  1. Depending on which part of Bernoulli we read, and how carefully we read it, we will come away with a different impression of what utility means and what EUT is. Not surprisingly, the economics literature is littered with arguments and disagreements and invalid studies that seem to arise from a confused use of EUT.
These equations of Peters are as nonsensical as anything in Bernoulli. But the latter did make some great discoveries. Peters can make no such claim. So what if there is some obscure branch of pedagogy in which stupid pedants have silly arguments? Actual economists- and most of us are economists in the sense that we manage our own money- don't bother with some obsolete methodenstreit which has no relevance to our lives. What we do care out is 'Mechanism Design'- the guys who manage our pension funds should be punished, not rewarded, if they piss our saving against the wall. We need 'incentive compatibility' in financial markets. The 'Rocket Scientists' with their lying 'Li Equations' need a dose of reality. Maybe telling them about 'regret minimization' and Hannan Consistency will help. But, equally, some degree of volatility or turbulent 'noise' is probably needful and desirable for the robustness of the system.
  1. Serious consequences

  1. This is a blog post, so let me speculate about the sort of trouble Bernoulli has caused over the centuries.
How can a paper which nobody has read, and which was pretty crap to begin with, have caused any trouble?
  1. There are special conditions under which criteria (Eq.5) and (Eq.6) are identical. Assuming that they are identical in general (which is often — wrongly — done), one would implicitly assume such conditions. I’ll tell you about two cases with troubling consequences (there are more).
  1. The fee is zero .
  1. Check this for yourself: set in (Eq.5) and (Eq.6). They really are the same then. But that’s not a very interesting case: of course I should “buy” the ticket if it doesn’t cost anything. Why not?
If its price is zero it is because there is no demand for it. It is not scarce. My e-books are an example of a good which has a zero price. You could read them for free. Maybe you will enjoy them. But you won't bother because there must be a reason why no one else is reading them.

Dog turds are another example of free goods. You are welcome to pick them up and put them in your pocket. You may believe they will one day become very valuable. But other people are likely to think you are a loony and give you a wide berth.
  1. The hidden assumption of zero fee utterly confused Karl Menger, and he concluded wrongly that utility functions have to be bounded to treat St. Petersburg-like lotteries.
If a utility function is unbounded, this means there can be a person who can himself be and can himself everybody else infinitely happy. In that case, there would be no scarcity and thus no Economics.
  1. Samuelson (1977) was so convinced by Menger’s incorrect argument that he wrote “Menger 1934 is a modern classic that stands above all criticism.”
Who now thinks Samuelson was a smart dude? He thought the Soviets might overtake America in terms of material prosperity. Why the fuck was he so obsessed with ordinal utility? Every ordinal measure must correspond to a cardinal measure. Why treat the latter as the Devil?
  1. Menger’s study (in German and behind a paywall) is here.An English translation (careful, it has a few typos) is in this book:
  1. Menger (1967) The role of uncertainty in economics. English translation by W. Schoellkopf and W. G. Mellon. In: M. Shubik (ed) Essays in mathematical economics in honor of Oskar Morgenstern, Princeton University Press, Chap. 16, pp 211–231).
  1. I have discussed the problem here.
In the relevant paper, Peters wrote-
In his Section 2, on p. 212, Menger wrote, referring to the original game A: “If B, who has an infinitely large expectation, would be willing to pay any amount of money for the privilege of playing the game, then this behavior would conform to his infinitely large mathematical expectation [...]
Actually B shouldn't have an 'infinitely large expectation' because infinite wealth is not feasible.
Not only will B not pay an infinitely high price to play the game, since this is impossible, buy he will not pay a very high price that he could afford. In any case, he will not, if he is sane, risk all or even a considerable portion of his wealth in a Petersburg game.”
This is common sense. A Petersburg game with a positive expected value would, assuming frictionless arbitrage, immediately go bust. Thus it will only survive on the margin as a Ponzi scheme or 'tax on stupidity' or a sort of cheap thrill indulged in occasionally.

Peters doesn't get this.
This seems to indicate that if individuals were willing to pay the highest price they can afford, Menger would have considered his paradox resolved. Assuming that the highest price one can afford is one’s entire wealth (i.e. that borrowing is impossible), Menger’s statement that “no normal person would risk his total fortune” would mean that by “risk” he meant “pay as a ticket price” and that he thought no one would pay his total fortune for a ticket in his game B. But since the worst-case outcome is a gain greater than the total initial fortune, there is no reason not to pay one’s total fortune.
Yes there is. Even if borrowing were disallowed, a coalition of buyers could immediately bankrupt the lottery. The fact that they haven't already done so means this is a 'tax on stupidity' or short run Ponzi scheme.

Peters himself notes-
Mathematical statements are correct in a sense that statements of other type are not. The price we pay for the certainty inherent in mathematical statements is that they refer to objects that don’t exist in an everyday sense of the word “exist”. It would be na¨─▒ve to use any mathematical criterion as a guide for decisions without questioning the criterion’s conceptual meaning and the axioms upon which its derivation rests. Applicability, or relevance to the real world, pertains only insofar as the axioms and their consequences are a reflection of the real world.
This is quite foolish. Axioms may reflect the real world and still be useless. They may be unrealistic and yet make useful predictions.

Bernoulli and Menger and so on may have been wrong about why Petersburg lotteries are avoided- it is because the Expected value depends on the actions of all other potential customers, not on the proffer itself- but their being wrong didn't matter because they were writing shite for other shite pedagogues.

Peters, too is wrong for the same reason.

The ergodicity resolution... assumes that equivalent lotteries can be played arbitrarily often, and this breaks down in Menger’s game – games of his type are atypical in the real world. If we come across such a game, it is a once-in-a-lifetime opportunity.
Like getting Madoff to accept you as an investor.
Mathematics cannot offer much help in this situation.
But Economics can help. If a proffer has a positive expected value you need to look at the Structural Causal Model which permits this to happen. In other words, you've got to look at fundamentals, do due diligence, 'kick the tyres' and other such humdrum stuff. Writing equations and dreaming of infinite wealth may get you paid- but the guy cutting your checks is either a con-man or a cretin.
It makes sense of random events only by embedding them in an ensemble of similar events, which may reside in parallel systems or within time.
Events occur in time. We have no access to 'parallel systems'.
In the single-event setup, mathematics must shrug its shoulders and admit defeat in the face of a moral decision.
No. In a single-event set up, mathematics can look at the components of the Structural Causal Model which may involve Physics or Psychology or Organic Chemistry. Maths can make those disciplines more productive.
There is nothing wrong with the mathematics in the ergodicity resolution [Peters(2011)]. If we are really offered Menger-type games to be played at an arbitrarily high frequency, so that we can play arbitrarily often in our finite lives, then criterion ii will be practically meaningful.
But it would be mischievous. We'd end up being suckered by a Madoff or made a laughing stock by a guy stupider than ourselves.
It is important to note that the time average growth rate (or expected net change in logarithmic utility) in game B does not fail to resolve Menger’s paradox mathematically (unlike the expectation value in the original game A).
That's why we know it is a crock of shit. A mathematical formalism which explains why Jack should barter his cow for a handful of 'magic' beans' is worthless.

Elsewhere Peters writes-

One method of computing both ensemble and time averages is to write down for a finite number of sample members and a finite sampling time an estimator of the quantity of interest. One then considers two different limits: for the ensemble average the number of samples is taken to infinity, and for the time average time is taken to infinity. If the two limiting processes do not commute, then the ensemble average is different from the time average, and the system is manifestly not ergodic
Economic processes do not correspond to ensembles- because of mimetic as well as 'Common Knowledge' type effects- which do not obtain in Physics. Nor are they usefully considered as 'time averages'. Essentially, a 'repeated game' equilibrium can be established very quickly but there is likely to be hedging on discoordination games so the dynamics becomes 'anything goes'.

Still, if at the margin, exogenous factors- not hysteresis- drive the dynamics, then we say the process is ergodic. Common Knowledge, 'Public signals' and mimetic effects can get rid of hysteresis very quickly though, it may be, the system preserves a 'memory' of this which is helpful for robustness or 'capacitance diversity'.

Some pedagogues may spell all this out and show it corresponds to Hannan consistent heuristics and links up with Evolutionarily Stable Strategies and some particular multiplicative update weighting algorithm and so on. But why bother? There is a demand for shite Economics and so sound-bite uttering Nobel laureates we shall always have with us as reminder of the ludic potential of the dismal science.

Peters, in his blog post, mentions 'prospect theory'- nudge, nudge, wink wink...

 Especially in the context of prospect theory one often finds statements criticizing EUT that are puzzling. Like this one from the 2002 Nobel Prize Ceremony Speech:

  1. “A key element in prospect theory is that individuals compare uncertain outcomes with a reference level which depends on the decision situation, instead of evaluating the outcome according to an absolute scale.”

    EUT already includes such a reference level: initial wealth. 
But we don't know what is or isn't wealth. That's where the Uncertainty comes in. Only time will tell which assets hold their value and which were worthless.

  1. Only under linear utility does the reference level cancel out. A researcher who assumes that Bernoulli and EUT are identical is likely to assume implicitly that utility is linear, in which case the reference level cancels out and would have to be re-introduced. 
Who gives a shit about these 'researchers'? They ain't finding the cure to cancer are they? They might equally well be doing Post Colonial theory or Jungian basket-weaving. 

  1. Kahneman refers directly to Bernoulli in his Nobel lecture, aware that something is not working in Bernoulli’s theory, but apparently unaware that Bernoulli’s theory is not the same as EUT.
So what? The guy was laughing all the way to the Bank.
  1. Let’s start considering time and ergodicity
Why? Will it make our dicks bigger? 

  1. Finally: a plea for treating the problem with the modern mathematical concepts we now have. By this, I mean: start worrying about time, and compute time-average growth rates.
Then travel back in time and give Bernie Madoff all your money. The maths shows he was right all along.
  1.  The “expected change of logarithmic utility” is nothing but the time-average growth rate of wealth, under multiplicative dynamics. 
But it is also utterly imbecilic nonsense. 
  1. You can learn more about this in our lecture notes. Once this concept has sunk in — that gambles are evaluated according to the growth rates they generate for those who engage in them — the type of confusion that surrounds EUT becomes almost impossible.
Some gamblers do get rich. Some people do win the lottery. So what? It is still a tax on stupidity. 

As for EUT- it has no place in the real world where Knightian Uncertainty obtains. 'Regret Minimization' dictates putting pressure on Regulatory Agencies to get Mechanism Design right. Also, it says enough with the Junk Social Science. Only Structural Causal Models which permit 'piecemeal engineering' deserve attention.

  1. EUT is the foundation of modern economics. 
Only from the point of view of pedagogues. 

  1. Despite this, I have yet to find a practitioner who uses it. 
Thus it isn't really the foundation of anything. 
  1. Of course I may be exposed to an unusual sample, but in my experience investors, bankers, risk managers, gamblers — no one uses EUT. Shouldn’t that give us pause? Economics is devoted to the quantitative evaluation of risky prospects, but the people who quantitatively evaluate risky prospects for a living make no use of the techniques it has developed.
Economics is not the teaching of Economics anymore than Creative Writing is the teaching of Creative Writing.
  1. The fundamental and fatal flaw is conceptual — parallel universes are used where there should be time and dynamics. 
It is because Time is not independent of Space that parallel universes popped up in Physics. 
  1. Because of this flaw, there’s nothing to check against, the theory is not falsifiable because it depends on unobservable states of happiness or discomfort. 
But Revealed Preferences are observable- coz they are revealed. Happiness is expressed. Discomfort gives rise to one's hopping from one foot to another in the queue for the toilet. 
  1. Technical errors and inconsistencies can be argued away. It’s what Pauli called “not even wrong,” and the result of this murkiness is the coexistence of mutually exclusive, contradictory theories. Nothing is wrong and nothing is right. Different “schools of thought” have emerged. Let’s acknowledge that and ask what it means. This happens in science but it’s always a sign that a deep flaw has to be corrected, that the appropriate language has not been found yet.
This also happens in discussion about whether Spiderman can beat up Dracula. Even smart people let off steam by arguing about silly stuff. Academic methodenstreit was long ago discovered to be utterly useless. What matters is Structural Causal Models which enable us to have cool new stuff at a cheaper price. 

  1. We believe we now know that appropriate language. It’s the language of time and dynamics.
Languages exist only in time. They are already dynamic. Maths has a long way to go till it catches up with three year old kids in this respect. Till it does, it should not consider its dirty diapers to be any great contribution to the commonweal.