What constitutes complexity and economics, you ask? Not long ago, we came across some research that provided the answer to this important question. There are four cornerstones of conventional economics that complexity theory puts up for grabs. They are:

1. Agent homogeneity (aka, the representative agent)
2. Well-mixed interactions
3. Rationality
4. Equilibrium

In complexity theory, these four things become:

1. Heterogeneous agents
2. Interactions on networks
3. Bounded rationality
4. Disequilibrium

Market efficiency implies a positive relationship between market risk and expected return. Using ex-ante conditioning variables implied by the definition of total return, the time series of US stock market data is partitioned into a set of conditional distributions. These distributions suggest that market risk is not universally efficient, but displays varying degrees of efficiency in generating expected return. The conditional distributions also exhibit differences in the expected mix of positive and negative outlier returns, sharpe ratios, maximal investment loss and business cycle Characteristics. A broader definition of efficiency compatible with these results is discussed in the paper.

Hardly a day goes by when I don\'t read something crazy on the subject of international trade, from pundits who blame it for America\'s economic and social woes, to those who think trade can only thrive in the context of treaties and war. In truth, international trade is nothing more than an extension of the idea of exchange itself: that all people are better off cooperating through contract than fighting with force and coercion.

Why the Efficient Market Hypothesis is not right.

The Fama-French Three Factor Model provides a highly useful tool for understanding portfolio performance, measuring the impact of active management, portfolio construction and estimating future returns. The Three Factor Model has replaced Capital Asset Pricing Model (CAP-M) as the most widely accepted explanation of stock prices in the aggregate and investor returns.

This talk was delivered at the Mises Institute\'s 20th anniversary celebration, October 18-19, 2002.

The economics prize goes to an outsider psychologist and a traditionalist who espouse conflicting theories on rationality.

A comparison of the contribution of John Nash and Ralph Elliott.

The Austrian School of economics is known for its aversion to mathematical modeling of human behavior. The neoclassical mainstream, on the other hand, is quite fond of this approach, and uses the mathematical method for just about any problem. I think it is fair to say that most mainstream economists would prefer the precision of a false formal model, versus the generality of a true verbal proposition. This misplaced reliance on the power of mathematical tools for economic analysis is epitomized in the field of econometrics, which employs statistical techniques in the study of empirical data concerning economic phenomena.

Much of economic and financial theory is based on the notion that individuals act rationally and consider all available information in the decision-making process. However, researchers have uncovered a surprisingly large amount of evidence that this is frequently not the case.

In a recent New York Times article, Hal Varian--a respected mainstream economist and textbook author--describes the contributions of Nobel Laureate John Nash:

So what did John Nash actually do? Viewers of the Oscar-winning film A Beautiful Mind might come away thinking he devised a new strategy to pick up girls.

Mr. Nash\'s contribution was far more important than the somewhat contrived analysis about whether or not to approach the most beautiful girl in the bar.

What he discovered was a way to predict the outcome of virtually any kind of strategic interaction. Today, the idea of a \"Nash equilibrium\" is a central concept in game theory.

In the opening remarks of Ludwig von Mises\'s first formal seminar in America, the revered teacher held up a copy of a book and announced: \"to understand economics, this is the book you should read first.\" According to Mises\'s student and friend George Koether, the book he was holding was An Introduction to Logic and Scientific Thought by MorrisCohen and Ernest Nagel, first published in 1934 and now out of print. Even in 1944, Mises must have sensed that formal instruction in logic, particularly as it relates to the social sciences, was in decline. Today, it has almost completely collapsed. This is not to say that one cannot find courses in logic on college and university campuses. But these courses are little more than decorations. Students take them to avoid having to take mathematics. They are given symbols and sets of rules for how to \"work proofs.\" There is no implication of larger issues involved. Brighter students inevitably come away with the sense of having just wasted time on a game.

What economics Ph.D\'s don\'t know.

Value stocks have higher returns than growth stocks in markets around the world. For 1975-95, the difference between the average returns on global portfolios of high and low book-to-market stocks is 7.60% per year, and value stocks outperform growth stocks in 12 of 13 major markets. An international CAPM cannot explain the value premium, but a two-factor model that includes a risk factor for relative distress captures the value premium in international returns.

Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent over-reaction to information is about as common as under-reaction. And post-event continuation of pre-event abnormal returns is about as frequent as post- event reversal. Consistent with the market efficiency prediction that apparent anomalies can also be due to methodology, the anomalies are sensitive to the techniques used to measure them, and many disappear with reasonable changes in technique

A great column by Mr. Brahmananda.

A review of Dinero, crédito bancario y ciclos económicos. By Jesús Huerta de Soto (Madrid: Unión Editorial, 1998, 630 pages, plus bibliography and index [Spanish]) And its comparison to Mises \"Theory of Money and Credit\".