Fischer Black, Noise and the Encounter With The Trickster

Reynard-the-foxIn mythology, and in the study of folklore and religion, a trickster is a god, goddess, spirit, man, woman, or anthropomorphic animal who plays tricks or otherwise disobeys normal rules and conventional behavior. — Wikipedia

Mathematics is often thought of by its proponents as a language that produces clarity. This may be true in certain cases, but in others it can cause a person’s thinking to become clouded and muddled. And this is precisely due to its overly precise nature.

Think about mathematics as one might a microscope. The microscope is highly useful for zooming in on certain aspects of reality and picking things out that we could not grasp otherwise. Great. But now imagine for a moment that if a person were to use a microscope over and over again they would begin to “see” all the world in this way. Clearly they would not be much better than a blind man in such circumstances – albeit one that would be very useful in very particular settings. This, I would argue, is precisely what too much reliance on mathematical reasoning can produce.

A good case in point is that of the financial economist Fischer Black – a mathematics PhD and founder of the popular Black-Scholes model of options-pricing that is much used in financial markets today. In 1986 Black published a paper entitled simple “Noise” that is well-nigh unreadable. One gets the sense that “noise” for Black is a sort of ontological category that disturbs his sense of reality. “Noise” for Black is the equivalent to what “Sin” is to Christians. Everything bad in the otherwise harmonious world can be attributed to this ontological category “noise”. In this regard it is worth quoting from the abstract – which, it will be seen, is so poorly written as to be barely readable.

The effects of noise on the world, and on our view of the world, are profound… Noise in the form of expectations that need not follow rational rules causes inflation to be what it is… Most generally, noise makes it very difficult to test either practical or academic theories about the way that financial or economic markets work. We are forced to act largely in the dark.

Note first that noise is seen to be an active “force” in the world (“The effects of noise on the world…”). Noise is not a passive effect for Black; it is an active entity – much like Sin for the Christians. In this sense, noise is not just a term or a concept used to denote a phenomenon for Black, it is not a metaphor; no, it is a really existing entity or thing. Noise, for Black, is thing-like.

Note secondly that noise is what causes expectations to be irrational. It is what causes us not to act in line with the ideal that Black holds to be the normal outcome of the market. Noise here is a sort of ethical category – again, its overlap with that of Christian Sin should be obvious.

Note finally that noise accounts for our academic failures and the breakdown of our otherwise “correct” theories in face of reality. In this noise becomes a sort of conspiratorial force in the world. If this entity did not exist the picture we have of reality in our heads would be accurate. But given that this entity does exist it interferes with this picture we hold, distorting it – a demon then, which plays tricks on the mind.

It is this sort of thinking that often leads mathematical economists back into the realm of extremely crude anthropomorphic binaries. Binaries which, upon examination, strike us as being little more advanced than fantasies of witchcraft and folklore. One can say an awful lot about contemporary financial theories, what they actually do and how they function, by examining these crude manifestations of the human psyche. But here we simply do not have the time nor the space.


About pilkingtonphil

Philip Pilkington is a macroeconomist and investment professional. Writing about all things macro and investment. Views my own.You can follow him on Twitter at @philippilk.
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1 Response to Fischer Black, Noise and the Encounter With The Trickster

  1. Pingback: Fischer Black Redux: The Impossible Circularity of a Metaphysical Argument | Fixing the Economists

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