Empty Theory: A Response to James R McLean on Michael Emmet Brady’s Purported Theories of Decision-Making


James R McLean has written a fairly coherent piece on my challenge to Michael Emmet Brady. He has also given me a rather nice point of departure with which to make my case against Brady. He has done so by providing a misinterpretation of Freudian theory — something which, as readers of this blog will know, tickles my fancy somewhat. So, I should be able to kill two birds with one stone; one being what I see to be Brady’s grandiose claims and the other being a misunderstanding of Freudian theory.

Regarding Freudian theory McLean writes:

One is that any theory about human behavior could be, to the same degree, accused of tacitly assuming that everyone it purports to describe “knows” the theory. Freudian psychology, likewise, “assumes people have first read and understood Freud”—for surely, for someone to make decisions in line with Freud’s work on psychology they would have to have first read and understood this work.

This is in response to my claim that Brady’s decision theory relies on the implicit assumption that people have read either Brady’s work or Keynes’ Treatise on Probability (and interpreted the latter in the same manner as Brady). Thus, for McLean such a complaint “does not work as a rebuttal”. The problem with this? McLean’s reading of Freudian theory is wrong.

Freudian theory, in fact, does make claims that people will act in line with said theory despite not understanding it. In point of fact, since the popularisation of Freud many psychoanalysts have complained that peoples’ superficial understanding of his work has made their job a lot tougher because everyone tries to vulgarly interpret their own symptoms and dreams and this detracts from the analyst’s ability to do so. (This is somewhat similar to the contemporary doctor’s complaint about people who try to self-diagnose using online sources).

Let me take a recent example I came across which shows how Freudian psychology can be used to understand aspects of peoples’ desires and actions despite their not understanding said psychology. From there we can then go on to show why Brady’s theory of decision-making is no such thing.

Some time ago I was talking to a girl I know. The conversation turned to children being influenced by a certain cultural trend. She said “why would I care if my children were influenced by…” said trend. She then quickly bit her tongue and said, “I mean why would anyone care that their children were influenced by…” said trend. The girl in question did not have any children, of course. A Freudian would conclude that her slip of the tongue manifested a desire to have children and that perhaps this was what was going through her subconscious mind at the time of the conversation.

In fact, this should be fairly obvious. Slips of the tongue always have such meanings. They manifest desires on the part of the person doing them that either they do not consciously recognise or they are trying to keep hidden for whatever reason. In this way Freudian psychology can tell us things about the people despite these people not being aware of Freudian psychology — something I can confirm about the girl in question. That is what makes the theory useful.

Something similar can be said of decision-making theories in economics. Take the Efficient Market Hypothesis (EMH) as an example. The EMH tells us that, given what it claims about how people make decisions, an individual investor cannot persistently beat the market. If we believe this theory — which, by the way, I do not but that is irrelevant to this discussion — then we can take investment advice from it: we would buy into index funds that track the market. The EMH does not rest on the assumption that everyone in the market understands and adheres to the EMH. That is what, in the view of its proponents, makes it a useful theory.

Or take the competing theory: behavioral finance. Behavioral finance also purports to tell us information that we can use in the real world. As the popular manual on technical trading Technical Analysis: The Complete Resource for Financial Market Technicians puts it:

Behavioral finance is a quickly growing subfield of the finance discipline. This branch of inquiry focuses on social and emotional factors to understand investor decision making. Behavioral finance studies have pointed to cognitive biases, such as mental accounting, framing, and overconfidence, which impact investors’ decisions. These studies suggest that investors act irrationally, at times, and can drive prices away from the EMH true value. Investor sentiment and price anomalies, either as trends or patterns, have been the bulk of technical analysis study. Sentiment and psychological behavior have always been the unproven but suspected reason for these trends and patterns, and human bias has always been in the province of trading system development and implementation. (P49-50)

Again, behavioral finance does not assume that everyone in the market need understand behavioral finance in order for it to produce valid results about human decision-making. This is, like the EMH or Freudian psychology, what makes it a useful theory in the eyes of its proponents; it is the fact that it can purportedly tell us something about what makes people tick regardless of whether they understand the theory or not that provides us with relevant and useful information.

This is the question I raised with regards to Brady’s decision theory: can it provide us with such useful information? If it can tell us how people will behave then we should be able to better understand financial markets with it — after all, this is what rival theories like the EMH and behavioral finance purport to do. If this is, in turn, the case then Brady or someone who is familiar with his theories, should be able to lay out a manner in which we can apply the theory to financial market data — again, this is what proponents of the EMH and behavioral finance actually do with these theories.

The problem with Brady’s theory is that I do not believe that it is such a theory of decision-making. Rather I think that it pretends to be but is actually something rather different; it is actually an idiosyncratic probability theory that really tells us nothing useful about how people make decisions. In this sense, Brady’s theory is useless.

McLean, who seems like a thoughtful person, actually gave this some consideration when he wrote at the end of his piece:

So James, in what sense is Michael Emmett Brady circulating a useful decision theory? In what sense does it have something to say about the real world? And I would have to say that Mr. Brady has always discussed its value in the realm of public policy…

The problem with this? He never specified the novel insights  that Brady’s theories give us with regards to public policy. Do Brady’s theories give us insights that standard Post-Keynesian theory cannot regarding public policy? I have certainly not been made aware of such insights. But even if they do exist, Brady’s theories are still not what they claim to be; that is, decision-making theories in the proper sense of the term. And that is my fundamental problem with them.

Where I disagree with the EMH and am cautiously skeptical of the claims of behavioral finance, I nevertheless recognise that they can actually be applied to the real world — and thus falsified. No one has shown me that Brady’s theories can be. And that is my fundamental problem with them. I don’t believe there is any there there; I believe Brady’s theories to be basically empty. They make the claim to be a theory of human decision-making, but no one has shown me how they can be applied to study human decision-making.


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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5 Responses to Empty Theory: A Response to James R McLean on Michael Emmet Brady’s Purported Theories of Decision-Making

  1. Sorry, I cannot understand how my analogy fails. Neither theories of probability nor Freudian psychology really require that people have “read and understood” the theory for them to be valid. For example, I doubt Leonard J. Savage thought people adhered to the Savage Axions because they had all read _The Foundations of Statistics_. In case it wasn’t obvious, I certainly didn’t wish to imply that Freudian psychology requires that everyone correctly understand his theories either (I certainly make no pretensions to). The point I was trying to make is that, no, of course no such prior understanding is required in any case.

    Also, you haven’t explained how vulgarization of Freud’s theories is of any relevance.

    In view of the time and effort required to falsify the EMH, I would suggest it is quite hard to tease out useful information from it (and to reiterate, I do not endorse the EMH at all).

    • “I certainly didn’t wish to imply that Freudian psychology requires that everyone correctly understand his theories either.”

      Um… that’s what you did on your blog. You wrote:

      Freudian psychology, likewise, “assumes people have first read and understood Freud”—for surely, for someone to make decisions in line with Freud’s work on psychology they would have to have first read and understood this work.

      I can only criticise what you write. And you wrote that Freudian theory requires that people have first read Freud.

      The point about Brady is that in order for people to make decisions based on his theory they would first have to have read it. I.e. they would have to apply his theory in order for his theory to explain their behavior. Otherwise how would they know how to undertake decisions in line with Brady’s idiosyncratic views on probability? It’s certainly not knowledge that I was born with. I suspect that you weren’t born with it either.

  2. Seriously, I know you understand what a_reductio ad absurbum_ is. Of course I don’t think people have to have read or understood Freud in order for it to apply to them. And if you failed to recognize my parody of your rebuttal, then–now you do know what I meant, and it’s silly to continue arguing with the parody.

    So now you do know: my point is that descriptive theories of behavior seldom (or never) require that their objects be familiar with their theories.

    Since that was the point of my original post, and you have not addressed that–just a misunderstanding of what I wrote–then no, you really have not replied to me at all.

    • “Of course I don’t think people have to have read or understood Freud in order for it to apply to them.”

      “it” here refers to Freudian psychology.

    • Your piece was extremely unclear in this regard. You should write clearer if you do not want to generate these misunderstandings.

      Still, my criticisms stand and the Freud example is a nice one because it shows what a real theory of human decision-making and motivation is versus the fake one that Brady is putting forward.

      Let me be clear about this: Brady claims that his decision theory is the basis of a microeconomics. This means that people act in line with his views on probability. But how would they do this without understanding the probability framework? Is Brady assuming that his probability is hard-wired into humans at birth? Is this something like Mises’ praxeology?

      I am responding to you. So either you’re being evasive or you don’t understand what I am saying.

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