The Game of Craziness Has Arrived on the Market

“The day they killed her, Rosita was lucky; out of six of the bullets shot, only one was to kill,” the verse of this Mexican song tends to be quoted by economist Roberto Frenkel to illustrate the problem of multiple causality located in complex systems such as the economy.

In search of ones to “blame” for the financial crisis that exploded in 2007 and whose effects are still being felt, an economist from MIT (Andrew Lo) and a Nobel prize laureate (Robert Merton) proposed the creation of an organism like the Federal Transit Administration in the U.S., famous for its skills in detecting the reason for natural disasters, to determine what were the main triggers for the latest economic debacle.

The econometric rivalry to detect “reasons with the most explanation power” became a sport, literally. To a point that the magazine of the Economics faculty in the University of Chicago asked Allen Sanderson, a prestigious professor from that institution, to make a “bracket” of 16 possible explanations of the crisis so that they would compete against each other, like the brackets of 16 college basketball teams that face off each spring in what is called “March Madness,” one of the most popular sporting events in the U.S. Besides being an economist, Sanderson is a fan of college basketball. His “Market Madness” included four zones, each one with four “teams.” Wall Street had key factors like “moral hazards ” (the exaggerated amount of risks taken knowing that there’s an insurance behind it to cover the costs) that were considered or the “excess in the compensation of bank executives.”

In Washington’s zone the impertinence of the Republicans and Democrats factored in as causes; in Main Street, the debt of the American middle class or the demographic problems; and finally, there was a zone for economists’ mistakes, with many boos to prognosticators, qualifiers and fantasized academic schools.

The 16 teams defended themselves with arguments and regressions; they started being eliminated in a direct way by votes from economics students and professors. The eventual winner was “Moral Hazards.”

Is not easy to explain this set. Academics have still not been able to agree until now about the causes of the Great Depression from the ’30s. One of the main theses in Nassim Nicholas Thaleb’s best seller The Black Swan is that of “narrative fallacy” — the human brain is used to being told stories, and it needs to identify “great causes” for “great events.”

The argument that “these things happen” isn’t very convincing at a neural level. As Uruguayan singer-songwriter Jorge Drexler says, “the world is the way it is because of certainties.”