Founder at Private Equity, Venture Capital and Real Estate Investments (PEVCRE), Angel Investor and Investment Advisor
Orthodox economic models are just theories of social science just like other social sciences mostly explaining the phenemona after the event, and don’t have much predictive powers no matter how much mathematics is employed. Economics have a science envy and economists have been trying to pass it as a natural science since the 19th century, and thus especially since the 1970s econometrics and mathematical models rule supreme. Always had a problem with this as someone who studied physics and then economics as a student of history, politics and sociology with a ‘masters in finance’ and I am glad that this is now getting discussed and challenged widely. And, ‘behavioural economics’, the branch of economics that came along to explain all the differences (to the real world) away so that orthodox economics still ruled supreme, and even got awarded Nobels for saving us from this important discussion that would challenge a whole ‘belief system’ on which the current World System is built, only postponed the eventuality. So yes, volatility is not equal to risk (however convenient it might be to have a statistically quantifiable measure to have at hand), and all modern finance theory based on efficient markets hypothesis is exactly that: a theory.
Financial Markets | Macroeconomics | Risk Management Author, Thinking Differently. Available exclusively through @portfolioconstructionforum.edu.au Founder, CAS Market Insights Pty Ltd
Harry Markowitz studied under Ken Arrow, who along with Gerard Debreu laid down the mathematical assumptions required for the existence of a general equilibrium. Harry made his name, as did many others like Bill Sharp and Eugene Fama, by applying the mathematics of Arrow and Debreu to finance. Arrow won a Nobel Prize but turned his back on GE theory because he considered the assumptions required to be utterly implausible. So, volatility is not risk. Markets cannot be “efficient” and pretty much everything taught to the current generation of orthodox economists is simply wrong. Economies and markets are Complex Adaptive Systems. Arrow knew this, and played a pivotal role in cementing Complexity Economics as a discipline at the Sante Fe Institute, which among many other scientific advancements pioneered AI modelling. For those with a mathematical bent, economies and markets are discontinuous, non-convex, and non-ergodic. This means - as Ken Arrow knew - that NONE of the mathematical assumptions on which the suite of general equilibrium theories used in economics and finance hold in the real world.
Pretty much the same in all the sciences, everything that can be fully explained with current mathematics is a simplification of the real world. That’s why mathematics is still evolving and new science is being discovered. Economics is just more of an approximation than the others, which makes it ‘a dismal science’.