So what does "trader realism" tell us, Ben?

According to Stein, professional traders, (like judges in the "legal realism" model) start from their desired conclusion, and work backward to rig up the necessary premises.

"Traders can see masses of data any minute of any day. They can find data to support hitting the 'buy' button or the 'sell' button. They don’t act on the basis of what seems to them the real economic situation, but on what’s in it for them."

Of course, classical economists would say, traders act on what's in it for them! So does everybody in the system, at least according to the classical model Stein may think he's refuting here. The difference may be this: Stein thinks the decision whether a "sell" or a "buy" has more "in it for them" has a non-rational, even an irrational, element based on, say, the corporate politics of the broker-dealer, quirks of bonus policies, idiosyncratic personalities.

A classicist who doesn't wish to conform to stereotype too tightly can of course acknowledge that traders sometimes act in ways hard to model. Still, those who consistently act on irrational factors will lose money. They won't stay in business for long. And if there are a lot of traders, and a lot of trading going on, then the irrational aspects are factored out within the whole system, the noise is filtered out and the market conveys information efficiently.

Stein's reason for believing this model is wrong and his "trader realism" has pierced a veil? An uncheckable anecdote. A "close friend of mine, now deceased," who used to be a trader in London for a major financial house, told him a story about shorting IBM on a dare from the boss, and then geting on the phone to spread rumors, talking down the price of IBM so his short position would pay off.

That's it. After the household meatloaf, the law school memories, the trader/judge analogy, we get around to a theory based on a single recollected story from one unnamed person who has shuffled off the mortal coil. Wow! On such evidence, many people seem to believe that Elvis continues to walk about and order Slurpees at various Quickie Marts.

Those of you who wish to follow reactions to his column ... as I've noted, the blogosphere is full of them. Here are just two links to get you going:

Blodgett.

Weiss.

Blodgett is harsh, Weiss is critical-but-sympathetic.

It's a tad anachronistic, but I can't help feeling that Oscar Wilde had Stein in mind when he had a character in one of his plays warn that "even these metallic problems have their melodramatic side."

Ben Stein's "trader realism"

In The New York Times this Sunday, Ben Stein has explained market volatility in a conspiracy-theorist spirit.

Stein isn't the type of guy who stocks up on canned food and worries about the black helicopters of the UN. He's perhaps best known as an actor (having played Ferris Bueller's teacher, having hosted game shows on television etc.) but he seems to think of himself more as an economist in the line of his father, Herb Stein, who chaired the council of economic advisors under Presidents Nixon and Ford.

At any rate, Stein seems to have carved out a niche for himself somewhere in between the worlds of financial punditry and entertainment. The actor who can discourse eruditely about economics, the finance pundit who can play a role.

His column Sunday begins with a personal note -- he reminds us that he is Herb Stein's kid, and tells us that when he was a child monetarism was a subject for dinner table discussion, over the meatloaf.

From this we seque to his law school education, to his absorption of the ideas known as "legal realism," and from there at last to the point. He has decided that what economics/finance needs is the sort of veil-piercing that the realist scholars brought to the world of law.

I once wrote a book which was largely devoted to the defense of formalism against realism within jurisprudence, so I guess I'n not the audience Stein had in mind when he introduced his conspiracy theory in this roundabout way.

If you'd like to read the column itself, please do sohere. I'll describe the theory to which his effort at veil-piercing has led him tomorrow.