Economics is sometimes weird and economists weirder. Here is how the story goes. The world is too complicated to analyze completely. So what do we do? We could write and write and fill up volumes about nothing and everything and still obviously be far away from understanding anything. But Smith was smart and Marshall smarter. They modeled! Culled away unnecessary details and built a fabulous, frictionless and benchmark world where everything happened instantaneously. The curious breed of smart economists (read macro-economists!) decided to go further and knock themselves out by fine tuning this idealized world to the maximum extent possible. What did you say? You might break your finger on Aug. 24, 2020. No problem. Assume there is a insurance policy you can buy now to cover this exigency! This is how we got complete markets.
What will prices be in with these complete markets? Simulate and there you go- you have prices of goods, assets and what not. You name it and we tell you how much it should cost! Wait a minute, what did you say? The price seems to low than what you would have set given a free reign? Thats not good. Then my theory is useless! Oh my God! I just got a Nobel!.
What happened next was the economist wrote another paper telling how his earlier theory under predicts the actual returns in the economy and therefore we have a puzzle to deal with.
Now being an amateur economist (remember, I am supposed to be more dangerous than an economist!) I cannot come to terms with this idea of calling something a puzzle when all it is a self full filing anomaly. It is obvious that when you abstract from so many details which by some criteria deem unnecessary, the implications are ought to be at odds with reality. So the original theory itself came with the anomalous implication. What was new and unexpected about it to call it a puzzle?
No one has time for this semantics, though. As I write this post there is probably one more paper being written about a claim to a solution to this puzzle. And mind well, there are too many proposed solutions around already. Therefore, we need some more papers to suggest some criteria to choose among them. Sift and refine them, till only a generally acceptable one remains.
Sometimes it gets tough to get going with this seemingly nonsensical way of doing things. But then one realizes thats what progress is about. Dig and fine tune till you get to the truth. The ever elusive but constantly beckoning truth.
I guess it is far more easier to engage in this kind of intellectual exercise if we do it for the sake of fun of doing it. Its akin to saying you like solving and designing new puzzles. Anomalies masquerading as puzzles! Or is it the other way round?
hmm……let me see……here is how the story goes…….
you know I can go on like this right! I told you I am an amateur economist ;).