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Why Economic Models Are Always Wrong
mayberry42 writes "Did you ever wonder how and why professional economists often seem to get it wrong in terms of predicting consequences or policies accurately (or even at all)? Or how very few even saw the current economic collapse? This article provides an interesting, if obvious, reason as to why economic models are effectively always wrong."
Most economic models are based on "how we would like people to act" rather than "how people actually act". Much of the time, the model works, but they fail when people act in irrational ways.
Simples.
"She's furniture with a pulse"
I wonder if that could apply.
... is not a science. The legal structure of money, the way prices work in a one way fashion, and private ownershp are all political all the way through. Now this may piss off Americans but there are alternative ways to organize society whether they like it or not. Human beings tend to be people of their era and they often have a profound lack of imagination, the black and white right/left thinking I see from people already disqualifies them for not even having the courage to analyze or think about the structures and societies in which they find themselves, the false notion that it is either THIS/THAT, BLACK/WHITE is having given up critical thinking and analysis for good.
I think the article is missing another key factor - the fact that people abuse the system to their benefit.
Starbucks, Harbuckle of Breath.
and I saw the current economic collapse coming.
Sometime back in 2006 (2005?) I read that the average american had spent more than they earned (i.e. borrowed on credit cards/etc.)
I then thought to myself: "self, start saving now because there is a storm coming."
Another indicator: housing prices were going up and up and up and all my friends were trying to convince me that buying a house is an investment (because that's what they were told) and that I should get a good one because I'd be able to turn it around for a profit. Since when is a house supposed to be an investment and not just a place to live in?
So small changes in inputs can produce big, unpredictable changes in the output of complex systems? It's almost as if a butterfly flapping its wings could affect the weather!
They should find a snappy name for this marvelous discovery. Something like "chaos theory".
Confucius say, "Find worm in apple - bad. Find half a worm - worse."
Many, many, many people saw the economic collapse.
I was reading plenty of blogs on the housing bubble, housingpanic.com, et etc, describing the preposterousness of "liar loans", subprime this, and idiocy that, and the crazy valuations.
The New York Times even had a plot of the inflation-adjusted Case-Schiller price index which was enormously above any prior peak. During 2006 and 2007 and 2008.
The notion that "nobody" saw it is simply propagandistic truthiness baloney. I personally didn't profit, because I was much too early shorting the mortgage companies & home builders and got stopped out---the bubble was too powerful.
The real crime is that a small number of very powerful people had an exceptionally lucrative interest in NOT stopping it, because they were getting ginormous paychecks from the continuation of the bubble. And now the notion that nobody could see it is used as excuses for the powerful to excuse themselves from responsibility from fraud and crime.
Down in the guts of banks, there were both risk modeling quants in the fancy banks, and the traditional "ladies with a bun" in the retail banks who processed the paperwork who saw how much outright fraud and insanity there was. Their jobs were threatened when they attempted to speak up and stop the madness, because the business side executives were making shitloads of shekels on volume.
Few people saw the collapse coming? Really?
All you had to do was turn on some form of broadcast radio after about 1995 and listen for a little while. When the commercial break appeared you heard one mortgage mill after another hawking refis, credit lines, etc. Bad credit? No credit? No problem! Interest only mortgage. Balloon mortgage. Jumbo mortgage!
This went on for years and years.
I saw it coming. If you missed it you're a fool. Maybe we just have a lot of fools.
Even if everyone acted rationally, you would then have the instability which is generated because all of these rational people would then change their behavior based on ... the model. It's unclear, and in my eyes rather unlikely, that a "fixed point" exists where all of these rational people start behaving identically and predictably.
The unpredictability doesn't only come out of irrationality. If you look at game theory, you see that many optimal (i.e., rational) strategies are "mixed" strategies where the rational party necessarily behaves probabilistically, not deterministically.
Models aren't equal to models, and even rough models of chaotic phenomena can be very useful and predictive, if they are the right ones. Read this for some acknowledgement of which brand of economics has been right during the last few years. Here is another account, including some pointers to predictions of the current crisis reaching as far back as 1999. Krugman even has a "model" of how good models get out of fashion.
Economics suffers from the manipulation by political interests, and by the wish of many practitioners to project their moral ideals onto the world. Many economists simply go and try to prove that the world works however they want it to work, and find funding for that from rich supporters. That makes the endeavour biased.
The problem is, that once it's known what's going to happen, the arbitage people will make it happen sooner, and sooner, until it becomes faster to predict again.
It's like if next weeks lottery numbers were printed in a newpaper, everyone buys tickets with those same numbers, so that a $1 ticket wins a one two-millionth share of a million dollars...
The basic theories of economics slavishly followed by bankers and governments that rule all our lives are based on patently wrong assumptions and simplifications, compounded by bad maths. Professor Steve Keen's book 'Debunking Economics' explains all. You don't know whether to laugh or cry when the stupidities are revealed one by one as the book progresses. We need a major change to the system to escape from it. (Debunking Economics - The Naked Emperor Dethroned, Steve Keen, Zed books Ltd)
I recall an article in the Econonist a few years back that described a time when a macro economist visited his chum, who worked on a trading desk in a large bank. The economnist basically came away saying that there's simply no time or space for elegant theories in anything that went on in that environment. The science of economics was more applicable to fly fishng than high frequency trading. But I think the real issue for economics is that it has historically been very prescriptive - what people should do - rather than descriptive - explaining what people actually do. This was forcefully highlighted by the psychologist Kahneman, who went on to win the nobel prize for economics. That said, I enjoy economics and do feel it offers a lot to the world. I also think the premise that economic theory didn't predict the economic collapse is wrong. My limited reading of economic theory left me with the impression something was going wrong (in particular Shleifer, A (2000). Inefficient Markets: An Introduction to Behavioral Finance). But any prediction using economic theory presumes we have access to the evidence required to make accurate predictions. What we are slowly seeing is that, in their rush for profit, institutions effectively hid their exposure to risk. This duplicity, more than anything, compounded by a healthy dose of herd behaviour, is the reason the approaching precipice was obscured.
In a religion, you just tell people what is the Truth. In science, you try to observe and learn.
The models are self fulfilling prophecies.
The high priests of the Economy tell us the Truth. The lower priests spread the word. And the people believe. Without the belief of the people, the system would instantly collapse. And if reality turns out differently, then they/we just invent a New Truth.
I mean, is it really necessary to give trillions of euros/dollars to banks to bail them out? In which pockets is that money disappearing? The bailouts are presented as "The Only Way"... but nobody actually knows.
From the article:
Wait ... you are saying the growing number on my bath scale isn't because the constant of gravity is growing? :-)
The Tao of math: The numbers you can count are not the real numbers.
the article suggests that our financial woes are caused by miscalibration of bank and stockmarket software models. I submit that the system itself is flawed. You can't make a working model of a broken system. The idea that if we could find a better software solution for banks all our financial problems would end is absurd.
So now stuff done in an introduction to numerics class is news.
Not much known to the general population, there are problems that cannot be calculated numerically, usually because a change of input magnifies immensely on the output. So an error of 1 on input becomes an error of 10^n (with n in the two digit range and bigger). The issue here is that basically by definition all numerical systems used to calculate in a computer have builtin error sources, and errors do accumulate.
The pain becomes even bigger if you consider that in floating point numerics basic mathematical laws do not apply, e.g. (a + b) + c = a + (b + c) is true in mathematical sense, but is in general untrue for floats. Using fixed point arithmetics, while in theory better, implies a rigorous error analysis (floating point is kind the "automatic" solution to the required analysis for fixed point arithmetics), which is especially in such "fantasy" models hard to do. (For many coefficients the "designer" of the model has no idea what the range of valid values might be. If you do not know the value range, you basically are forced to floating point, implicitly accepting that you have no real idea about the error to be expected, beyond the general knowledge of the used floating point system.)
of Economics tries to take the veneer of science by using a lot of mathematics. But this is not good. With powerful enough mathematics you can make almost any story you please fit your historical data. And there is certainly plenty of motive to do just that. Economics is rarely based on experiment. Granted there might be some psychological experiments that can inform economics, but most economics isn't based on that.
Democracy Now! - your daily, uncensored, corporate-free
The phenomenon this guy has observed is nothing to do with chaos theory, as several posters think, but rather to do with error propagation and model uncertainty. This is an issue whether the model is chaotic or not. His mistake is to think that calibration has to choose a single set of parameters, and then one has to make a single prediction from the model. Statistical methods can take into account many sources of uncertainty, including the range of parameters that could have produced the original data and intrinsic stochasticity in the model. The best way to do this is using Bayesian techniques.
You're still limited by how realistic your model is, and this is likely to be the real problem with economic models. However, Carter's argument (that it's fundamentally impossible to fit a model to itself and then make consistent predictions) is wrong.
http://www.debtdeflation.com/blogs/2011/10/27/george-monbiot-seminar/
comment first, facts later. http://chem.tufts.edu/AnswersInScience/RelativityofWrong.htm
"Or how very few even saw the current economic collapse"
Y'know, there's an entire school of economics that predicted the collapse. And the collapse before it and the ones before that. It's called the Austrian school. But even though they predicted every single damned collapse because they didn't use shiny models and after the mid 90's shiny powerpoints nobody pays any attention to them.
But people don't want good models. They want models that predict massive proffits. Doubly so when they're paid on commision and it's someone else's money.
404: sig not found.
"Remember that all models are wrong; the practical question is how wrong do they have to be to not be useful." (George E.P. Box and Norman R. Draper, Empirical Model-Building and Response Surfaces (1987), p. 74)
"One of the most insidious and nefarious properties of scientific models is their tendency to take over, and sometimes supplant, reality." (Erwin Chargaff)
I think that says it all, really.
--Bud
The Keynesian system of economics fails to model reality well because it's seriously flawed. The Austrian school of economics, which is similar to what was used in the United States pre-Keynes and whose economists did accurately predict the current economic crisis, is an entirely different matter. Look at Peter Schiff, Ron Paul, and a number of others -- they have been debunking Keynes for years. They've also been pointing out that the artificial "stimuation" of spending and the idea that your house is an investment rather than a liability or at best an item whose value is controlled by supply and demand and with the retirement of the baby boomers was bound to experience a slump in demand. With the addition of government interference in backing unrealistic loans for those who couldn't afford them, the writing was on the wall. We need to ditch the idea of a "centrally planned" economy and Keynesian economics generally if we want to have any kind of realistic understanding of how markets really work, and before we shoot ourselves in the foot yet again.
NetShadow
economics is not physics!
That is the great insight that Ludwig Von Mises repeated throughout his career. Attempting to model human behavior as if it were possible to predict our behavior the way you can predict the outcome of elastic collisions is preposterous. There are however, economic laws which can't be overcome by violence or wishful thinking, and it was the operation of those laws that made the collapse of the romans and the soviets (to name two obvious examples), inevitable.
-jcr
The only title of honor that a tyrant can grant is "Enemy of the State."
Societies have been organized differently in the past which is evidence that refutes your rather limited view of the world.
the even larger one looming next year
The Austrian school doesn't presume to say when these collapses will happen, only that they must. It's like watching termites attacking a house. You know it's going to fall eventually, but whether it takes a year or five years depends on far too many factors to predict.
-jcr
The only title of honor that a tyrant can grant is "Enemy of the State."
That man knows nothing about economic modeling. His whole story about "calibrating the model" is just pure and utter bullshit - so much it makes my head hurt to read that. Sure, someone trying to model who knows nothing about it might try to force the model to fit the data, but that's not how actual Economists do it - you'd get laughed out of grad school if you tried the things he mentioned in his articles in a research paper. I'm currently finishing up my Masters in Applied Economics and do quite a bit of modeling on a regular basis. There is no "calibration" - merely statistics. You include all the variables you consider relevant and then start whittling out the ones that are statistically insignificant in explaining the variation in your dependent variable. When dealing with forecasting, you never use the full time series data set in your model - you use most of it and then leave part of it for testing the accuracy of your model (so you can compare the forecast values with the actual values). If you've done a good job collecting a large enough data set and including the necessary variables, you'll have some pretty damn good predictions for the first part of your time series. Obviously, like with any type of prediction, the farther into the future you try to forecast, the less accurate you'll be. Hence why you continually gather more data and further refine your model and keep redoing the predictions.
The other wonderfully fallacious thing that he had in his article was not pointing out that Finance is NOT Economics. Financial data, such as the stock market, is VERY hard to predict (and actually due to basic financial theory regarding market efficiency, if the market is efficient then you should NOT be able to predict stock prices) due to the obscene amount of variables involved and the fact that there are decisions made based off emotion and not purely mathematical logic (such as bank runs and panics in the stock market).
"The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants." ~Thomas Jefferson
...and Peter Drucker observed or rather stated the obvious years ago: One can't really compare models in physics with models in economics, though it's tempting. The problem is, the model or a theory that tries to explain the real world beaviour will be applied in the real world which will in turn influence the real world system, which will eventually adapt, rendering the initial observations (that led to the theory in the first place) irrelevant for future explanations. For example: Every theroy we build on which parameters influence inflation will eventually influence economic behaviour by tuning monetary and fiscal policies according to theory. Market participants will eventually accomodate and alter their inflation expectations and in turn economic activity. Compare that to a model in physics: No matter what the explanation we find for the real world system, that theory will not influence the system. It doesn't matter to the system whether we think Newtonian physics or relativity is correct.
So, every economic model or theory will eventually become wrong. Econophysics, statistical mechanics and complex network theory may be the key to unlocking economic science and taking it a step further (from crystal ball gazing)....let me dream....
I feel so sig.
I work with groundwater models, and (at least where I work) we do not consider the models to be predictive. Rather we hope they will give us a better idea of what is happing with a particular site. We combine this with "trend" analysis and real world data to get an idea of what's actually going on with a site. We do not believe we know what's going to happen based on the model, but we hope that the model will tell us what direction things are headed so we can prepare for it.
The landlord makes money either because (a) he inherited it and cannot find a better return on investment, or (b) the system is fixed to keep his interest artificially low, whereas the renter does not have the same access to cheap credit and so would have to pay more on a mortgage.
From scarped cliff or quarried stone she cries "A thousand types are gone, I care for nothing, no not one."
Many, many, many people saw the economic collapse.
A newsletter from an economics professor and CNBC financial commentator: ...
Any talking head who tells you that this market is a buying opportunity has his/her head screwed on backwards. The only buys are the kind of value plays that the likes of Buffett are pulling off. That is, it is very much a stock picker’s market.
Recession plus inflation plus a credit crisis plus a softening European economy plus an inflation-plagued Chinese economy plus Russian strong-arming in natural gas plus two leading presidential candidates who are ignoramuses on economics plus a rising long bond in the face of Fed rate cuts does not a bull market make."
http://www.peternavarro.com/2008.02.01_arch.html
"Thursday, February 28, 2008
That is his oldest newsletter but I understand he was telling his economics students to "get out" of the market in fall 2007. Plus he was showing them a whole bunch of historical indicators that were all pointing in the wrong direction.
Actually, I'd say Germany and the US are a pretty fair comparison. If you really believe the population of Germany is homogeneous, you should try visiting sometime.
-- Let us endeavor so to live that when we pass even the undertaker shall be sorry. -- M. Twain
instead of working ones. They derive every behavior from one single model. Not even physics can do that.
Since I already posted, I'll just have to "tip my hat" to your succinct and slightly sardonic reply by posting (which means something, since I almost never post "me too" comments).
Hope some of the late-comer moderators mod you up!
This is absolutely true.. I don't know how they have shielded it from us for so long! "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." - Henry Ford
The models that are so continually wrong are those with an ideological bias. The models which have been consistently correct are ignored because they're out of favor.
It's only the "geneous" part that is in dispute.
Just kidding.
If you've never read Twain's piece on the German language, you should look it up. It's a hoot.
Why Bad Writing Easily Gets Published
Why Logical Reasoning is so Hard to Find in Today's News
Read an Entire Article that Provides No Supporting Examples
Why I can't get a job writing articles for a decent newpaper and pay off my student loans (I got tired of capitalising).
Horrible article. I honestly feel sorry for whomever hired this guy to write for them.
That's politics, not economics. You want room 12A, just along the corridor.
Confucius say, "Find worm in apple - bad. Find half a worm - worse."
The problem was that it was not the greed of a few, it was the greed of the many. In particular, everyone likes to blame the banks or the government, and they certainly had a role. But the main blame goes to that paradigm of virtue, the American People. They took out mortgages they couldn't repay, second and third mortgaged their houses, bought stuff on credit they couldn't afford, spent more than their income, flipped houses, etc.
The government abetted this type of behavior by guaranteeing home loans for McMansions via Fanny Mae, Freddy Mac, Ginny Mae, and a few others. There was also a push by liberals who thought that somehow the poor were being disempowered by not being able to buy a house. Added to that, the push by conservatives who thought that a free market meant no regulation and proceeded to tear down the walls between investment and commercial banking.
This enabled the investment banks, who had tentacles around the world, to securitize loans and sell them off as hot potatoes. They never kept those loans because they knew better. They also sliced and diced them so no one could figure out how unroll them. The rating agencies, not wanting to lose any business, thought the investments AAA, remarkably, and the amount it increased the bottom line was just the price the market owed them for their valuable service.
Seeing the demand, the housing industry produced giant builder companies which rolled out McMansions by the shit-load. They wouldn't build a single house, they would instead buy whole tracks of land and populate it with McMushrooms.
This sort of demand also let your local politicians dream of fatter tax takes by changing zoning laws to accommodate the builders. And if they could get a piece of the action themselves, well, they were there to serve the public weal and they public dutifully served them.
This encouraged the real estate agents and property assessment companies to go with the flow. If customers were willing to flip houses, then they were there to ensure the houses got flipped and the prices showed a good profit for the flippers. Every flip meant a commission to both the real estate agent and the property assessment company, not to mention the local tax take and the other assorted creatures who have their hand in on every sale.
The problem, of course, is that while these different versions of the model might all match the historical data, they would in general generate different predictions going forward
If these morons knew a little more about data mining techniques and in special, if they weren't so greedy, maybe we all wouldn't be facing this global economic mess right now..
1. Bet against the economic models.
2. ???
3. Profit!
I'm not a lawyer, but I play one on the Internet. Blog
Not to mention it's a gimme. All booms eventually bust, it's called the business cycle.
Speaking of which...
You haven't seen anything yet. These criminals which run everything now, are not happy with just owning everything thing, they want control. To do this, they will collapse the economy and then call for even _MORE_ centralized control.
When I say criminals I mean:
Lloyd Blankfein
Larry Summers
Ben Bernanke
The Federal Reserve Board
(I would list the owners, but the list is _CLASSIFIED_ by the US Military and State Department....and the Federal Reserve isn't even a government institution!)
They create the crisis, then they propose the solution. When this collapse happens, decentralization will be the only way out.
We must reverse all forms of Globalism and excessive centralization of power, otherwise things will get much much worse.
Finally we see the Catholic Church's real face, as they call for a One World Bank, where only one financial entity controls all the rules of commerce, all buying and selling and trade world wide. Right out of the book of the Apocalypse, Jesus Christ.
If these Federal Reserve/Wall Street who are planning this, successfully reform a new even more centralized financial system, humanity will be plunged into a new dark age.
With a single formed entity that all nations pay to in the world, they will be all but unstoppable. They will have the ability to raise their own private Army, and every nation on the earth will be shackled under a tyranny that has never before been seen.
This level of centralization of power will breed forms of corruption the world must never see or humanity won't survive.
-Hack
Got Geometrodynamics? Awe, too hard to figure out? Too bad.
Allow me to correct you - this is what Economics actually is.
-- "So they told me that using the download page to download something was not something they anticipated." - Bill Gates
unless all its activity is used in the act of prediction (the universe predicts itself in real time, but does nothing else). It will be always difficult for humans to openly predict the behavior of humanity. The reason is simple: if you openly predict accurately the future, the margin to profit from that knowledge is so big, that the market will modify the trend, and your prediction will meaningless. The only way to predict the future with a high degree of accuracy, without influencing it with the prediction you must do two things: - do it secretly, in a small group, so that there is no "market" - do not use your knowledge to alter in a big way your prediction. That is, you can profit from your prediction, but not too much compared to the quantity being predicted. A concrete example: I predict rightly that the price of oil will be 200$ in one month. If I make that prediction open, and the market trusts me, the market will immediately adjust to that prediction. Those market forces will render my prediction completely moot. If, on the other hand, I keep that prediction to myself, I can profit from it as long as my profits are not affecting in a big way the price of oil.
Quite a few people who had good savings still lost jobs, burned through their savings and retirement funds and in the end lost their homes anyway.
The idea that only bad or irresponsible people lost their homes in foreclosure is magical thinking. You can be a responsible person and still get wiped out
during a deep recession.
They never take into account asshats.
Every economic model has rational demand and rational supply, both with equal amounts of information and that everyone acts in his/her own best interests all the time, even over the long term. This is bogus, and has always been bogus.
It's the same reason why pure ideology never works. It's the reason why communism failed and it's the reason why Libertarianism fails. Because asshats.
--
BMO
Is the art of examining the impact of human reasoning (or more often emotion; suchs as fear and greed), on the financial world. By using common historical models, a fair amount of predictive element becomes realized, but it cannot be a definitive model. Human behavior to one series of events will not have the same outcome as a very similar series of events 5 years or even 50 years later. But there is a pattern to it in a general sort of way.
The 'economic' systems are NOT mathematic. Money is a 'perceived' value artifact.
Economic systems are roughtly equilivant to an analog volume control operated by a 2 year old, linked to the clock chip of your (overclocked) home computer.
IT makes for interesting performance figures, or can crash your computer.
With apologies to Scott Adams:
And next week we'll have a doctor with a flashlight show you just where economic models come from.
Go ahead, laugh. It's funny because it's true.
The point the author may be missing here is that in a competitive environment such as financial models, the goal is not necessarily to model the market but to make a model better than everyone else's model. Consider sports, where you have a "spread". If I can model a sport and generate a better spread than the one being generated by the Vegas model, I win. If I can't, I lose. Stocks are very much the same thing, where the price of a company represents the "spread" of future earnings and I need a model that is better than everyone else's model in order to win $$$. As Einstein might have said, the quality of your model is relative to what you are comparing it to. If you compare it to perfection (actual data), surely any model will be less than perfect. But compared to OTHER models, it may be excellent. The article doesn't really quantitize what is meant by "really bad predictions" going forward so its hard to judge his findings anyway. If its wrong more than half the time, that's probably a bad model. Was it? Or is he calling 75% "really bad"?
There is no spoon.
My first Journal Entry ever, in 8 years! http://slashdot.org/journal/365947/aphelion-scifi-fantasy-horror-poetry-webzine
In the recent PNAS paper http://bit.ly/uI1nxG one can read that prevailing economic models of credit risk assume that price fluctuations form a bell-shaped curve, with very large fluctuations essentially never occurring. But during financial crises, wild fluctuations occur more frequently than these models predict. Authors developed a method to incorporate these fluctuations in their analysis of financial data from 488 publicly traded manufacturing firms for each quarter from 2000–2009. The researchers used multiple types of known calculations to analyze financial data such as the ratio of working capital to total assets, and sales divided by total assets. These data were plugged into multiple ratio calculations to estimate credit risk for the companies. Particular attention was paid to the years 2007–2009, a time of overall financial crisis. According to the authors, the results suggest that even during stock market crashes, the basic dynamics that underlie less volatile periods still govern credit risk. The study revealed that credit risk follows slowly decaying functional form, implying that dangerous credit positions are more likely than is commonly believed. According to the authors, the credit rating approach may help improve the estimation of credit risk, particularly in the event that financial services companies respond slowly to changes in corporate credit quality.
The current financial crisis was manufactured, not a poorly modeled prediction.
"If any question why we died, Tell them because our fathers lied."
I know the article claims "Calibration--a standard procedure used by all modelers in all fields, including finance--had rendered a perfect model seriously flawed." but obviously our climate models are simple enough that you can't just calibrate the parameters until it matches the data, right?
If motivated financiers can't get their models correct, why do people believe that climate models are anywhere close to reality?
Where the article contends that this is because of "calibration" issues, it manages to really confuse the issue.
The fact is that model calibration is usually not a sinecure that can be (blindly) entrusted to a software package (as so many practitioners are fond of doing).
There is a large grain of truth in the suggestion that model calibration fails because various sets of parameters can fit the data on which models are calibrated equally well. In order to reliably calibrate such models, one must calibrate submodels (that describe observable phenomena) in isolation. Next those parameters should be kept constant and the other parameters calibrated. That's how university researchers would (usually) do it.
Practitioners (consultants) are usually under constraints of time and budget and will typically face clients who (a) know absolutely nothing about the models they commission and use, (b) know less than nothing about how models ought to be calibrated (c) believe that any calibration that fits the data is OK and (d) will simply pick the very lowest proposal to calibrate their model because they cannot distinguish between a methodologically sound calibration proposal and a trashy one.
As a result, consultants cannot sell a ' proper' calibration when someone else is offering a quick-and-dirty calibration, and give up trying after a few failed proposals. This in turn ensures that models are often calibrated in zero-knowledge mode (i.e. just fit the data and don't think), and hence are open to large errors in cases where such simplistic approaches are inappropriate.
As so often, the market mechanism will ensure optimum (read minimum) pricing for specified objectives and measurable deliverables at the expense of unspecified or unmeasurable ones (such as methodological soundness of model calibration).
And that has little to do with any inherent weakness of models, but a lot with the inherent flaws in the way models are calibrated and used.
What did you do back in your grade 6 science class?
You ran experiments and you learned these two important lessons:
1, you ran the experiment multiple times (repeatability)
2. you try and very only 1 variable at a time
Neither of these is prevalent in any human system. Whether that is economics, politics, or even sociology. This makes predicting anything very hard. You can have 10 PHDs, and you really have as much insight into the economic system as someone with reason.
The great depression happened once. It happened under certain condition. A certain set of policies were tried. We know that those policies under those condition did not solve the problem.
But we have no way of knowing how another set of policies would have reacted. We have no way of knowing how some policies that applied under the situation of the great depression applies to the situation today. It's a human system, ever variable matters. Technology, family size, urban divide, globalization, the media... It's a billion variable equation.
In something that is more of a science, you can at least attempt answers by running experiments over and over and changing variables... you can test out any answers.
You can't do that in economics, because... we are running live.
This is not to say you shouldn't study economics. You should. But it doesn't provide anywhere near the reliability of science and really shouldn't be used heavily by politicians.
Because all economist mentioned are Keynesian economists. Browse around mises.org. Search for articles in 2003-2007, and it is obvious they saw it comming. Here is one notable austrian economist. You would think politicians would be knocking at his door constantly to help them see. If you claim it was a fluke, here is another much more famous guy that follows austrian economy, that predicted every single recession since 83. Heck, you can also predict the next recession, just spend a few hours reading on mises.org, they have courses for free.
You could if the constitution wasn't ignored.
There are 50 states. They should each have their own banking systems, their own education systems, etc, etc. So you don't need to scale up to larger sizes than those European nations.
I will, thanks!
-- Let us endeavor so to live that when we pass even the undertaker shall be sorry. -- M. Twain
An economist is someone who, if you don't know a phone number, will estimate it for you.
Sorry, but gray text on gray background is making my eyes bleed.
No you can't. Sure you can get lucky.
But there's too much randomness to make such fine grained predictions. The housing boom in the US could have kept going for another year or two. Or it could have burst a year or two earlier. You can easily tell that there's a bubble, you can easily tell that it is going to pop at some point, you can't tell exactly when that pin will appear.
If you could you would have made several trillion dollars in the last few months in just the silver futures market.
A relationship between money and debt is inevitable. Imagine there is no money. Suppose I do something for you in exchange for a promise of reciprocation. You are now in debt to me, in the traditional sense. There's no numeric accounting, but this notion of debt is firmly buried in human psychology and is part of the reason humans are able to build economic systems. Then you do something for me and we're even. Now formalize it: imagine, when I do this something for you, that you create out of thin air (in a ledger, in our heads, in the location of special shells which which mutually agree will represent it) a numeric representation of that debt. Then, when you reciprocate, this accounting is reversed and both debt and proto-money disappear. Or, alternatively, I could instead pass these tokens on to another person in exchange for a promise that /he/ will receive the return of your debt instead. And thus the money begins to circulate, and in effect you are the central bank.
Money IS debt. It's a transferable formalization and extension of one persons social obligation to return a favour to another. Replace it with a 'resource based economy' (I presume you mean replace token money with something like gold) and things won't be much different. People will expect that receiving gold from you entitles them to be given useful products or services in exchange for it. They will be just as unhappy if that is not the case - they'll fell just as much as if a social obligation has been broken - if that doesn't happen and they're left with gold as they would if they were left with tokens.
People did predict the economic Collapse. Ron Paul predicted it all along, as many others did. Those who "failed to predict" it are simply those economists and politicians who stood to gain financially from the whole thing. The issue isn't that it is impossible to predict what is to happen, but rather, that those who are in positions to control and predict are those who stand to gain in the bubbles that end in economic turbulent times [read the Fed, Wall Street, Washington].
The biggest problem with modeling is with the modelers. They don't ever seem to look at what they're doing with a critical eye. Any time that you have a huge parameter set and a limited data set (economics, weather, science) you can fit anything to a model. It basically reduces to fitting a spline to two data points.
I've watched it happen for years in drug discovery research in the pharmaceutical industry. The problem is that the modelers know how to run their programs and the more they know about how to run their programs, the less they have time to understand about the stuff they're trying to model. But the managers love it cause they don't have time to understand either and they like the quantitative aspect of the whole exercise. They can use the models to show how they're gonna be more productive. In the meantime, the whole world goes to crap.
You cannot predict, to any reasonable level of accuracy, a binary value of "Sunny / Not Sunny" for anything past 3-5 days.
That's despite the fact that we have centuries/millennia of data, hugely complex models, thousands of amateurs and scientists in the field, that there are huge benefits to even the common man in doing so (let alone things like fisheries, farming, etc.), that the question is simple to define and simple to answer once the date draws nearer, etc.
What on earth makes anyone think that ANY mathematical formulae will reasonably predict the actions of millions of individual, self-managing, inter-connected entities that consider themselves to have free-will, can act impulsively and without reason, and interact in a billion times more complex ways than we can ever model?
Economics and forecasts are NOT about predicting the future. That's stupid and impossible. They are about determining what the most likely outcome is and "hedging your bets" that way. Sometimes (in fact, quite often) that will be wrong because you have insufficient data and are only projecting a "most likely" outcome from all of the statistics. That's why we don't let banks "run on empty" and they have to have some insurance, backup, funds, procedures etc. (even if they *aren't* perfect).
Economical models are not mathematical precise. They contain mathematics. They use mathematics. They rely on mathematics. But their inputs and results are chaotic and random and the best we can do to that sort of data is statistics (i.e. making arbitrary things equal to numbers, then guessing what that means based on those numbers).
There is one single change that will have an immediate affect on all this business.
... all the funds in their collection are making money !!! They tell you ... had you invested your pocket money in 1980 ... you would have been a millionaire.
... had you invested in those funds that started 20 years ago, you would have been a millionaire. That is like saying had you bought the lottery ... because that chart behind them is made up with the winning funds. The loosing funds have been removed from the collection that makes the trend, as they are no longer available to invest in today, so why include them in the trend of the funds they are offering that you invest in !! Off course they keep saying past performance is not indicative of future trends :-) ...
... selling insurance my friend as well as fees and charges on their advice (PS: Fees and charges is the same word, they just invented two words to charge more :-)
... if your investment starts turning south, somebody that works for you might advise you to move your money into a safer investment.
... you couldn't make up such a scam (at least I couldn't) :-) even though I am being burnt by it as we speak :-)
KPIs on financial advisers.
If you go to a financial adviser, and pay him money to advise you where to put your money.
You should be able to choose the financial adviser that has made the most profit for his customers.
Well that information is only known to banks. Why is that ? Because even though you pay financial advisers, they actually work for banks and not for you !
Most financial advisers are actually crap, and don't make money for their customers. When you walk in their office, they show you amazing trend graphs, What they don't tell you is that they started with 1000 funds 20 years ago, and slowly retire the bad performing funds, and introduce new ones as time advances. So amazingly
Now be careful how they word it. They say
Where do they make their money you ask
One last detail
Somebody that works for the bank might rather keep the money there to protect the fund.
Guess who the financial adviser protects ?
I love this stuff
If you laid all of the economists in the world end to end, you still wouldn't reach a conclusion. Duh.
Chewbacon
The Bible is like Wikipedia: written by a bunch of people and verifiable by questionable sources.
Several people saw the crash coming (Krugman, Stigliz et. al.) the problem was lots of people were getting paid really well to justify what their bosses were doing to make boatloads of cash. It is called control fraud - look it up. I am ashamed scientific american is trying to blur this crystal clear problem.
Did you ever wonder how and why professional economists often seem to get it wrong in terms of predicting consequences or policies accurately (or even at all)?
No, but I have been wondering how and why they get to keep their job after they get it wrong.
The three laws of thermodynamics:(1) You can't win. (2) You can't break even. (3) You can't even quit.
The model can be fine for the existing data. But the problem with any model comes in extrapolating to data points beyond your current data set. http://en.wikipedia.org/wiki/Extrapolation#Quality_of_extrapolation It's not a surprise that many models extrapolate poorly.
lots of people predicted the economic meltdown. They just weren't very popular because a) Goldman Sachs et al run this country, and they pocketed trillions (20% of our GDP baby) and b) for anyone that mattered it was safe to ignore the cries of impending doom because there was a Republican in the Whitehouse.
So yeah, broad statical analysis can predict economic behavior. It doesn't mean anyone will do anything about it.
Hi! I make Firefox Plug-ins. Check 'em out @ https://addons.mozilla.org/en-US/firefox/addon/youtube-mp3-podcaster/
False. My mother told me and my sister when we were very little that advertisements were all lies. So we watched TV looked at commercials and said "No, that washing powder is not the best, they are lying!" Etc. I remember that, and it worked although I presumably would not have been influenced anyway.
I have never bought any product because of advertising. I have only once thought in a supermarket "Hey I remember that froma commercial, perhaps I shoud try it". All other times when I want to try something new I just go for no-name stuff and/or something that seems interesting. Not because of advertising.
You mentioned Derren Brown, well, his stuff doesn't work well on me either, I've seen his programmes and almost all of it is clear to me, how he influences. It is scary how easily it is to influence people, but I will give you an example:
He tried influencing people by asking say someone in a say to show something then at the same time asking directions or something, and he had for example an expensive watch (IIRC) in his hands, then said 'It is ok' (or similar). The seller assumed the situation was ok, Derren Brown walked out of the store with the expensive watch. Later the guy in the store realised something was wrong.
The interesting thing is, I know that this doesn't work because when someone comes round to buy something I always have this feeling to be really careful and not get distracted. And no, I had never seen Brown nor anything like that before. Also, in the same episode he showed a hot dog salesman, whom he could NOT influence, he wouldn't have this "it's ok" as "Payment was made". I think a hotdog salesman will have seen the bullshit people try so much, that it's impossible to fool him.
So I think that when people get more aware of themselves and the way they are being manipulated, the less they can be manipulated.
For myself, any purchases of devices are made by going to websites to compare specs, prices, experiences of others, and of course my own wishlist of features. I am aware of how people are, thus that for example negative experiences are by nature more prominent because people are disappointed, posititive experiences usually contain little information... Advertising certainly does not work on me...
Parents should do as my mother did, and I'm sure advertising would have to change. That would be nice...
by case and shiller. go look it up, read it, and toss this out.
modeling people is difficult if not impossible, and they dont always listen when economists DO know whats going on
PS: I don't reply to ACs.
When we have a housing market with a total value of $13 Trillion, and a Credit Default Swap market based solely on that housing market, that has a total value of $35 Trillion, and people are still making models that say we're financially sound, the problem is obvious.
They are the ones holding the $22 Trillion of unbacked debt and they're trying to fool eveyone else into buying it off of them before the whole shit storm blows up.
-Rick
"Most people in the U.S. wouldn't know they live in a tyrannical state if it walked up and grabbed their junk." - MyFirs
Back in 2003, in response to a Bush effort to tighten accountability over Fannie Mae and Freddy Mac, Barney Frank said they "are not facing any kind of financial crisis" and complained that people "exaggerate these problems."
So even Bush knew a problem was looming. If even he could see it, then a lot of people must have been able to see it.
I'm not sure that GM is the company that I would trust with any prediction of future needs or supply. Math doesn't seem to be among their stronger skill sets.
No.
Next question.
Oh, why?
Because global warming models are based on physics, not dodgy financial "theories". They aren't made by plugging random numbers into a randomly chosen set of equations, they're made by plugging real physical constants into descriptions of known physical theories.
OK?
So this guys model is not stable in the sense that it's own data can not be used to calibrate it. The natural conclusion is that one should run this test on their own models to determine how robust they are to their calibration procedure. If you can't produce the same model by calibrating it with it's own output, you've got a serious problem. This guy assumes that all models suffer from this, but I'm not convinced by his single data point.
My friends and I are not economists. We predicted consequences in 2004 of policy shifts accurately. Not seeing the economic collapse on the horizon was caused by politicians, C*Os, and economists with their heads up their ass. Most politicians, C*Os, economists ... delusionally love what they see from their perspective and provide their shit to US, EU .... Also, we knew that the Rove-Chaney-Bush plan for private retirement accounts to replace social-security was a scam to pump money into the economy, prevent the pending collapse, and distribute more money into WallStreet, Banks ....
Most US companies (C*Os) pillaged and destroyed the corporate employee retirement funds and then put US on the hook for providing those corporate employees retirements.
Anyway, most C*Os and politicians are criminals or idiots, and almost all walked away with our money and no punishment. We should take C*Os and politicians money, retirements, homes, cars, health coverage, college funds/tuition ... and pay down their fair share of the national debt, because We The People will still be paying the bulk of the national debt bill.
Unaccountable leaders are masters, and unrepresented people are slaves. How do US and EU fare?
Doctors haven't cured cancer
Physicists haven't made a fusion reactor
Brain Surgeons can' t operate on Alzheimers
Rocket Scientists can't fly us to Mars and Back
News at 11
I'll see your hokum and raise you a boondoggle.
A lot of people are holding forth on why economic models are wrong, but few comments are related to the actual subject of the article. (By the way, unless I missed something, the article itself is very vague on what work is done. I think it may be referring to this Jonathan Carter, and the research findings may be related to this 2005 paper.
The article is about the following situation: you have a model (statistical model, computer simulation, etc.) that you want to use for prediction. It has some "knobs" (parameters) that you can twiddle to change its output; this is necessary because the settings of these knobs are often unknown a-priori. So people "tune" or "fit" or "calibrate" the model to observed data to determine the parameter settings in order to make predictions.
A problem occurs if there are many different "knob settings" that cause the model to behave similarly on past observed data. Statisticians call this an "identifiability problem" (since you can't hope to identify the true value of the parameters from the observed data. Ecologists call it "equifinality", since there are many equally good ways to reach the same final outcome. And engineers call it "multimodality", where the fit of the model has many local minima. (Or you could get a whole "ridge" in parameter space that is equally good everywhere along the ridge crest.)
In such circumstances, you can't determine the true values of the parameters very well, even if the model is perfect. This isn't about imperfections in the numerical model, or in the mathematical theory. It's an inherent consequence of the relationship some models have with the data.
This also is not a consequence of imprecise data. There is always some uncertainty about model parameters given noisy data, so you'll never determine the true value of parameters exactly. But this isn't what it means to be non-identifiable.
An example of the real problem of non-identifiability: suppose your model is y = (A+B) * x + error. It's pretty clear that if you measure y and x, all you can hope to determine is the linear combination A+B, and not A or B individually, even if you have perfect data. (That is, unless you have some additional source of information to constrain their values other than y and x.)
The above is a case of perfect non-identifiability. Other models are just "nearly" non-identifiable (e.g., they have "almost flat" ridges in parameter space). Then you can identify the parameters eventually, but only with unusually good data, or multiple data constraints. As an example of the latter, you could observe one quantity that constrains the parameters to a ridge in parameter space, and another quantity that constrains the parameters to a perpendicular ridge, and the intersection of the ridges is well constrained. (Think of an "X" shape, or something like this figure, except the ellipses are stretched into ridges extending across the whole parameter space).
Non-identifiability is sometimes a problem for prediction, and sometimes not. The issue is that different parameter values can be consistent with the same data. If this relationship also holds into the future, then it may not matter: you might not know what the true value of a parameter is, but if all the allowed parameter settings lead to the same predictions, maybe you don't care if you get the parameters themselves wrong.
However, the relationship may not hold into the future: parameter settings that give similar predictions for historical data may lead to very different predictions for the future. This is the real problem, and it can't necessarily be solved with better data if the model is truly non-identifiable. Then you have to simply prepare for the wide range of possible outcomes.
What the article doesn't make clear is that not all models have this problem.
Most of today's economists believe in Keynesian central planning, not true free market economics and sound money like the Austrian economists. Students of the Austrian School predicted the economic bubble and subsequent collapse because they very well know the obvious causes.
RON PAUL 2012!
Stunning.
You've got it exactly wrong.
It was the Austrians (e.g. the Randite moron Greenspan) who got us here while the Keynesians (who don't believe in central planning) predicted exactly what would happen.
Game theory always does account for things like that, primarily because the behavior you're describing is not irrational. The very fact that you are predicting that "he gets ahead" is what makes it rational.
Same for your "when they zig, you zag" idea: I have never heard of anyone using game theory that doesn't account for (and in fact, predict) that sort of behavior.
If you want to come up with an example where game theory doesn't work, you're going to have to try a few thousand times harder than that.
The reason game theory tends to disappoint, is that peoples' intuitive hunches for the payoffs of certain actions don't match the theory, but those hunches are what they act upon -- and that in turn changes all the payoffs, sometimes toward causing the hunches to becomes true (!) and sometimes toward causing the hunches to be more false. And that itself can be analyzed and predicted, but only if you just happen to know what other people's hunches are going to be -- and that is never predictable.
Game theory is about finding optimum equilibriums for behavior; it can never tell you what people believe.
BTW, back onto GP's subject.. a few months ago I went on an AdamCurtis-athon with some high expectations. It was a letdown, and not nearly as serious a criticism of the targets as I had hoped, especially since I just assumed some of them (e.g. the neo-cons) would be shooting fish in a barrel. I won't say watching all his docs is a waste of time -- it's not -- but don't get your hopes up. You'll find some good anecdotes, carefully selected interesting trivia, and great quotes like the one about economists and psychopaths .. but that's all.
As copyright owner of this comment, I authorize everyone to defeat any technological measure which limits access to it.
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I agree. I've always been frustrated by the blame someone-else crowd (where someone-else = banks, government, both). This was greed from top to bottom with the NINJAs, flippers, and HELOC ATM borrowers as complicit in the implosion as anyone else.
A crisis like this doesn't occur in just a year or two. It has to grow for a while.
The prime mover of the collapse was the longer-term buildup of bad debt due to subprime mortgages. Right smack in the middle of the subprime mess were Fannie Mae and Freddie Mac, underwriting about a quarter of all subprime mortgages.
Ok.
There are however, economic laws which can't be overcome by violence or wishful thinking,
Wait, what?
There are two types of laws: physical laws, which are better described as models of the physical world based on the assumptions that a) we have the means to discover relationships between physical events, and b) nature doesn't cheat. Then there's everything else. There are no economic laws. At best, there are models of how humans behave and how they exchange goods and services. We might have the ability to discover relationships between events in human relationships and interactions, but there is one thing that completely invalidates any attempt to present an "Economic law": humans cheat. And a single human can have an impact that goes far beyond how many people he or she interacts with.
Anybody who says that their economic model is an immutable law is selling snake oil.
Those who can, do. Those who can't, sue.
Which it makes it completely useless to make decisions. See also a broken clock.
Those who can, do. Those who can't, sue.
At university, boring lectures were relieved by staring into the back of the prototype Phillips Machine, face to the wall because it was then unrestored. WikiP shows it was/is a fluid-dynamic macroeconomic model, only needs filling with coloured water. Something reminded me of my Northumberland G-Granny's meaningless rhyme "I fell into a bucket of eggs / and all the yaller ran down me legs". The best in that room went into banking - now they know too.
"Math is hard."
The cake is a lie.
No brain, no pain.
He has been maintaining a blog for over a decade, go read is predictions... Hint: They came true.
The real issue is that the media will put anyone on the air under the title of 'economist’ and give them all equal weight.
So you have a Nobel prize winning Dr. of economics being compared to some self proclaimed 'economist'.
It's sad. Now uncommon, I see this in science 'debates' as well.
I'm not going to get int a discussion about Paul Krugman and politics. All I am saying here is read his blog and look at the predictions.
Then read his book. THEN form an opinion.
The Kruger Dunning explains most post on
Bzzzzzt, try again.
While the moron Greenspan was once a Randite, while in control of the Fed he did the complete opposite of what he said he once believed in.
i.e. He practiced 100% Keynesianism at the Fed.
"There is no spoon"
True, but there are five interwoven economies that can all acquire spoons in different ways: :-)
"Five Interwoven Economies: Subsistence, Gift, Exchange, Planned, and Theft"
http://www.youtube.com/watch?v=4vK-M_e0JoY
"This video presents a simplified education model about socioeconomics and technological change. It discusses five interwoven economies (subsistence, gift, exchange, planned, and theft) and how the balance will shift with cultural changes and technological changes. It suggests that things like a basic income, better planning, improved subsistence, and an expanded gift economy can compensate in part for an exchange economy that is having problems."
The text for the presentation is here: http://www.pdfernhout.net/media/FiveInterwovenEconomies.pdf
A 21st century issue: the irony of technologies of abundance in the hands of those still thinking in terms of scarcity.
http://i.imgur.com/tPdL9.jpg
Also:
http://krugman.blogs.nytimes.com/
Go back 11 years and start reading that blog.
The Kruger Dunning explains most post on
Not a true enough scotsman for you, eh?
Sigh, misleading thread name which makes basic error of confusing finance with economics. This may be news to some people but they are not the same - you only have to talk to a Financial Quant Analysts for around ten seconds before this becomes immediately apparent (they are basically statisticians)
Anyhow on the main points:
1) Lots of economists were pointing out the increased risks in the global economy prior to the financial crash, they were ignored all called 'doomsayers'. In part because it was in the interest of vested interests to do so, but also because it is now clear that actually some of those interests (e.g. the Banks) really didn't know what they were doing.
2) Nobody predicted exactly when it was going to happen because you can't predict the kind of confluence of several events which trigger that kind of crisis. Contrary to what some financial experts were saying this was not a one in a million event, as ultimately they lost sight of the difference between systematic and non-systematic risk.
3) In part this is because economics handles confidence effects poorly, a lot of models try to pin things down to fundamentals on the assumption that eventually they will act as an 'attractor' and drag the economy back on track.
4) Economics also handles financial markets poorly, partly because of the confidence issue (above) but also because of how wealth and confidence effects effect behaviour in asset markets.
e.g. you buy a house, if everyone buys houses their value starts going up due to scarcity, this makes homeowners more wealthy on paper, so they upgrade to a bigger house or spend their wealth on other things, add in speculation in the housing market and you can see how this cycle can go on and on. But, confidence effects can inflate this well beyond fundamental values which means if something serves to knock that confidence (say a recession) it can go into reverse. So this combination of factors acts like an amplifier in either direction, which is obviously not good for market stability, particularly when factors like confidence can shift very rapidly.
The main problem with most commentary on economics is that it comes from pundits or half experts who have an interest in taking a position one way or another (typically working back from the conclusion they want and choosing their model to get there).
Very good points.
What about venture capital? They don't get a dime until IPO or buyout, and yet them putting money in startups so that they could grow is considered a valid investment, not a speculation.
Anything that you buy expecting/encouraging it to grow in value could be considered an investment. Risk is a different matter. You could argue there is higher risk that growth will never happen than the risk that you won't get any dividends/interest- but there are risks in both situations.
--Coder
There seems to be general confusion between general economic modelling and quantitative models for pricing derivatives etc. This is not least helped by the TFA which also seems to confuse the two. Quant pricing models are not predictive models, they are tools for pricing and risk-managing derivatives. As some famous quant once put it, all pricing models are just fancy interpolation schemes.
A pricing model starts from the position that you can't predict the future with certainty. Instead, the idea of the model is to describe the joint probability distribution of the relevant variables underlying the derivative. These are things like short-term interest rates, stock prices etc., and generally not macro variables like GDP or jobless rates.
The probability distribution produced by the model doesn't even have to match the real world probabilities of the events, it just has to match the probabilities which are implied by the market prices of instruments which can be used to hedge the relevant risks, the so-called "risk-neutral" distribution and its variants. Given enough reference prices, a complete picture of the risk-neutral distribution can be built up. The issue of calibration comes in because in practice, there aren't enough reference prices to build up the complete picture so you have to start making assumptions, i.e. specifying functional a form with some free parameters, and fitting those parameters to what you can observe. But this is still not about prediction, it's about getting a full description of "what the market thinks now about all possible futures".
The point of the article is not that economic models are flawed (don't represent reality), but that models can give wrong predictions even if they're perfect (accurately represent reality), due to unavoidable uncertainty in their inputs. I go into more detail in this comment.
"There are monetary units and there are measurable physical units of various economic goods and of many--but not of all-services bought and sold. But the exchange ratios which we have to deal with are permanently fluctuating. There is nothing constant and invariable in them. They defy any attempt to measure them. They are not facts in the sense in which a physicist calls the establishment of the weight of a quantity of copper a fact. They are historical events, expressive of what happened once at a definite instant and under definite circumstances. The same numerical exchange ratio may appear again, but it is by no means certain whether this will really happen and, if it happens, the question is open whether this identical result was the outcome of preservation of the same circumstances or of a return to them rather than the outcome of the interplay of a very different constellation of price-determining factors. Numbers applied by acting man in economic calculation do not refer to quantities measured but the exchange ratios as they are expected--on the basis of understanding--to be realized on the markets of the future to which alone all acting is directed and which alone counts for acting man.
We are not dealing at this point of our investigation with the problem of a "quantitative science of economics," but with the analysis of the mental processes performed by acting man in applying quantitative distinctions when planning conduct. As action is always directed toward influencing a future state of affairs, economic calculation always deals with the future. As far as it takes past events and exchange ratios of the past into consideration, it does so only for the sake of an arrangement of future action."
There are those that forecasted 2008 economic collapse but those in responsible positions, i.e. Alan Greenspan and Suze Orman, chose to ignore and continue to dupe ordinary people to make themselves more wealthier. Real crime is these people are doing the same crap again and again.
mfwright@batnet.com
The problem is that there's no fish, and all the conjuring tricks in the world can change that, and can't fool the punters forever.
-- The Grand Teddy Bear has Spoken: "Windows 8 Source Code Available NOW! more disgusting than your pr..."
...that it would be adequate to staunch the bleeding, but not enough to jump start a recovery. At the time, the US economy was shedding jobs like crazy, since the stimulus the shedding stopped and there were some modest employment gains. One can argue whether that's due to the stimulus til the cows come home, but it's pretty much what the Krugster predicted.
Never let a lack of data get in the way of a good rant.
I work in higher ed. Three years ago we were cutting to the bone, now it's raining money and we're building like there's no tomorrow. When the loan bubble bursts it's going to be very ugly.
Never let a lack of data get in the way of a good rant.
Ignore facts, expertise, education; do what FEELS GOOD to you personally. This anti-intellectual attitude isn't the only reason people are more foolish today than in the past (including the ironic lip service payed to education.) The consumer culture we've built to extremes since WW2, raises us upon following our thoughtless and emotional impulses. It doesn't feel good to hear things that are unpleasant.
With heavy personalization, we are taking this to another extreme where one is automatically censored from even seeing something that doesn't feel good; it has and will continue to even change how people interact as they become more sensitive to unpleasant things -- since they grow up not being exposed to them as often.
Democracy Now! - uncensored, anti-establishment news
Most economic models will continue to be wrong because they are predicated on the lie that an economy can continue to grow exponentially, forever.
In what way do they do that? How is it even possible to build an economic model that assumes that? By writing an assumed growth rate in to it, maybe...but that would be rather silly if GDP is one of the things you wish to predict.
Also, in what way is suggesting that the economy can continue to grow exponential forever a lie (other than in the 'eventually there will be the heat-death of the universe' sense)?
It's not just the models that are wrong - Since it's hard to find any information relating to business and the economy that does not promote continuous growth as being the number one metric of a successful economy, this tenet of free-market capitalism is engrained in the minds of most people.
Amongst typically general-audience media output you're certainly right. The purpose of an economy is not to produce output in as large a quantity as possible, but to maximize the welfare of its citizens given the resources it has. That means not working too much as well as not working too little, it means not degrading the environment in which people live without sufficient offsetting benefits to justify it, and it means creating the right outputs and allocating to the right people (and not, say, making 2m right shoes and no left shoes, or similar less silly examples). It's not at all obvious that economies are correct in choosing the working hours that result.
And yet, it is demonstrable using very simple arithmetic, that it is impossible to achieve.
We're collectively fucked unless that belief can be reversed.
Perhaps you should have considered including the arithmetic in your post if it's so simple. When you do, please do not neglect to consider the difference between value of output and its physical size, the possibility of new energy sources, the existence of resource recycling and the possibility of substituting less available raw materials for more available ones.
Take a look at the Freakanomics and Super Freakanomics books. They talk all about how irrational folks are with financial decisions.
I don't buy the premise of the article at all. If wildly different parameters for your model can satisfy the data, then you don't have enough data. That is all (though it is occasionally a legit problem in economics).
The real problem (as has been mentioned here already) is that most economists are heavily biased in favor of certain outcomes. Most economist jobs exist solely for the purpose of advocating particular views or policies. They end being wrong not because they use the wrong model or insufficient data, but because they reach a predetermined conclusion that has no real basis other than that someone paid them for the effort.
The only person to successfuly predict an economy was Hari Seldon.
I claimed, truthfully, that they were a big part. Two companies, 1/4 of the subprimes, leveraged for more than the five top investment banks combined.
The subprimes wouldn't have even been there if not for government interference from the likes of Frank. In fact, he resisted regulation specifically because he wanted more subprimes issued ("affordable housing").
The change in regulation brought it to a head, but it only brought to a head a situation that had been building for years.
I've always said that trying to put a fixed equation to something as random as human nature should have your ass tossed into a mental institute for life.
If you think you can predict and perfectly model human behavior, not across one person but across the entire population, and build an economy around it, you're fucking insane.
Still waiting on Serviscope_minor to wake up to fucking reality and realize that Jessica Price isn't going to fuck him.
O wait, no I don't.
"Economic models are always wrong", geez. So, when interest rates fell people didn't take out more loans? When unemployment is high, overall demand doesn't tend to drop? When cellphone service is provided by just a few carriers prices don't rise?
*Some* models are very sensitive to their parameterizations. And yeah, they'll be really tricky. Lots of economic models are really, basically, correct.
If there were a mathematical model which could predict market fluctuations, people would incorporate that model's decisions into their investment choices, driving up the price of things now which the model predicts would rise later.
Any such model, if it were accurate, would be very useful to investors - and its usefulness to investors would preclude its accuracy.
It's a bit of a Godel problem, ultimately.
DRM: Terminator crops for your mind!
Lemme get this straight. You're telling me the Austrians who are calling for the abolition of the Federal Reserve believe in central planning? Show me the Keynesian that says that the actions of the Fed triggered this mess.
Don't let it put you off his earlier documentaries.
> Which it makes it completely useless to make decisions.
The decision is whether to exterminate the termites or let them continue to do the damage. Debasing the currency has the same predictable effects every time a government does it, and that's why we have a clause in the constitution that forbids it.
-jcr
The only title of honor that a tyrant can grant is "Enemy of the State."
Lemme get this straight. You're telling me the Austrians who are calling for the abolition of the Federal Reserve believe in central planning? Show me the Keynesian that says that the actions of the Fed triggered this mess.
Learn to read, idiot.
The original poster said:
Most of today's economists believe in Keynesian central planning
This is a ridiculous claim.
Elastic collisions are predictable, eh? Have you ever seen 2 identical pool breaks? Even a 3-ball scenario can be unpredictable (two object balls touching each other, aiming to hit both simultaniously).
Also FatPhil on SoylentNews, id 863
As a slow learner, taking 33 years to go from my HS diploma to a BS degree, I got to see some of the changes in Economics first hand
My first Macro Economics class was concerned with STUDYING the market to see how it was affected by consumers and take advantage of their NEEDS, WANTS, and DESIRES to produce products to fulfill their expectations... thus providing products, and services that people would exchange their hard earned money for and make a profit for anyone serving the market successfully...
By the time I graduated (Business Management) it had changed to an "Applied Science" focused on CHANGING consumer behavior and INFLUENCING society... the problem being it only influences that portion of society that doesn't understand economics...
The rules of the game as I was taught early on would have predicted (and did from the mouths of those still using them) all of the economic woes we've seen...
The Social Tool that "Modern Economics" theories are based on don't really work quite the way the books claim... kinda like when the butcher puts his thumb on the scale and says "this is for Timmy’s College Fund" and the customers don't appreciate the "contribution" they're making
I know perfectly well how exponential functions work. You've utterly failed to answer any of my questions. In particular, you don't appear to have noticed that economic output is measure by value, not size. It's quite possible to have ever increasing output without increasing inputs at all....you simply make better products from the same materials.
In this case, the dude had a physical based model that is known to describe the phenomenon. Simplifying this model to fit the data is a bit weird in this situation, though it might be a fun suggestion that physicists should provide models that can be calibrated with different number of data points. Oh, if you have only 10 points, use Kepler's law, between 10 and 100 you can use Newton, more than one 100, use Einstein.
Blah, blah, blah. Forrest and trees, people!
The question is not how to predict bubbles, but how to *eliminate* them! C. H. Douglas had this all figured out a long time ago. Read!
Social Credit would solve everything...