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The Almighty Buck Science

Why Economic Models Are Always Wrong 676

Posted by samzenpus
from the soft-science dept.
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."
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Why Economic Models Are Always Wrong

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  • Obvious really (Score:4, Interesting)

    by BeerCat (685972) on Thursday October 27, 2011 @03:06AM (#37852892) Homepage

    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.

    • by Mathinker (909784) on Thursday October 27, 2011 @03:21AM (#37852948) Journal

      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.

      • by fremsley471 (792813) on Thursday October 27, 2011 @06:13AM (#37853562)

        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

        I prefer:

        ...in formal experiments, the only people who behaved exactly according to the mathematical models created by game theory are economists themselves, and psychopaths

        Adam Curtis, The Trap: What Happened to Our Dream of Freedom, Part 2.

      • by Tacvek (948259) on Thursday October 27, 2011 @08:35AM (#37854250) Journal

        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.

        Hell, even if it were the case that there were a point when people acted in a totally predictable fashion, despite or because of the existence of the model, there is still another issue. Any sufficiently high quality economic model will be modeling a chaotic system. By definition chaotic systems are extremely sensitive to initial conditions. Even if your model has the parameters perfect, if you are even slightly off in your initial conditions the output can differ enormously. This is actually made worse by the fact the the chaotic portion of the model often has minimal impact on the output most of the time, but other times it becomes a dominant factor.

        For example, chaos becomes a dominant factor during a catastrophic market collapse, since the exact order of events (what company's go out of business in what order, whose stock prices drop the most before regulators freeze trading, etc) is extremely sensitive to initial conditions, and the order of events determine whether certain events occur at all. If the order of events allows one of the big players in said market barely managing to remain in the game vs them going out of business can make an enormous difference in how quickly said market can recover.

    • Re: (Score:3, Interesting)

      by Anonymous Coward

      Yep, most economic models do not take actual human action into account. There are some economists that do consider human action, though (and even consider it the foundation of economics). Interestingly, those economists were the ones that did predict the current economic collapse, but were pooh-poohed and marginalized for their views.

      • Re:Obvious really (Score:4, Informative)

        by trout007 (975317) on Thursday October 27, 2011 @06:03AM (#37853518)

        Here is the book you want to read if you want to learn economics that makes sense and has real predictive powers.

        http://mises.org/Books/humanaction.pdf [mises.org]

        I've been reading about Austrian Economics for years and it has made me much better at understanding what is going on.

        I have also saved myself quite a bit of money. While everyone was using their home like an ATM I was paying off that debt and buying gold. I wasn't able to convince my wife to sell the house and rent for 5 years but that is mostly because where I live the rental homes were not very nice. The brilliance of this book is that it takes the fact that humans act as the given. It doesn't try to push a moral code on how they act or judge them for not behaving the way the author thinks they should.

        • by makomk (752139)

          Last I heard, Austrian economics had all the problems related to the use of parameter-fitting that more mainstream economics did, except that their models were known to be inaccurate and couldn't even predict the past very well and they just ignored this issue.

          • by snowgirl (978879)

            Last I heard, Austrian economics had all the problems related to the use of parameter-fitting that more mainstream economics did, except that their models were known to be inaccurate and couldn't even predict the past very well and they just ignored this issue.

            Models? Austrian economics is widely criticized because it specifically REJECTS scientific models. Sure it has a few "thought-experiment" models that turn out to be wishy-washy, but parameterized models? They specifically reject.

    • by captainpanic (1173915) on Thursday October 27, 2011 @03:33AM (#37852996)

      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.

      • Not only that, the money was lent almost completely without strings or controls, and lent back to the governments rather than used to lend to people and businesses.

    • Re:Obvious really (Score:4, Interesting)

      by mikael_j (106439) on Thursday October 27, 2011 @03:42AM (#37853010)

      Ah, to quote an economist acquaintance of mine "Economics isn't about numbers, it's just psychology on a mass scale" and "In school they teach us that everyone is a rational actor but everyone is completely irrational and refuses to admit it because then their models wouldn't be accurate".

    • by hitmark (640295)

      Never mind that in economist modeling, rational means accurately predicting future events. Anywhere else, that would be known as clairvoyance...

    • Re:Obvious really (Score:5, Insightful)

      by janimal (172428) on Thursday October 27, 2011 @04:15AM (#37853150)

      Just ask Derren Brown if people are predictable. If you think people cannot be modeled, you are deluding yourself. Adam Smith saw it, and came up with a revolutionary theory that worked. Amazingly enough, his model assumes that all people act in their own self interest.

      Of course, the way you interpret the 'self interest' is what varies, but I am pretty sure that for the majority of humans self interest is fairly narrowly defined.

      Saying that every human is unique and special is like saying you're immune to commercials. It's just wishful thinking.

      See comments below. The crash was predicted. People acted in a predictable way.

      • by Hatta (162192)

        Adam Smith saw it, and came up with a revolutionary theory that worked.

        Except for the cases when it doesn't.

      • by Kismet (13199)

        Ever read Adam Smith? I have. Smith's economic theory of "self-interest" worked great up until the development of the mature money economy. In other words--not for very long. It was originally based on the idea that the rich landowner would naturally distribute his goods among his tenants, or else risk the material wealth going to waste. After all, he could only personally benefit from a small portion of it. Today's wealth is more effectively locked up in abstractions that offer the potential for eternal, u

    • by khr (708262) <kevinrubin@gmail.com> on Thursday October 27, 2011 @08:55AM (#37854406) Homepage

      The way I'd heard it phrased is "to an economist, the real world is a special case."

  • I wonder if that could apply.
    • by janimal (172428) on Thursday October 27, 2011 @04:38AM (#37853220)

      Yes.
      1. The economists, who were correct were not listened to. (just look up Peter Schiff's predictions and how he was ridiculed)
      2. The economists, who were wrong were listened to, because that's what everyone *wished* were true.
      3. If anyone was in a position to personally gain from what was going on, they would most likely not have stopped it. So even if there were potential whistleblowers among the bankers and brokers, their incentive structure made whistleblowing a dumb move. If everything is going to s**t and you know it, but are in a position to set yourself up for life from the situation, or risk your job and your retirement saving a train that you probably couldn't stop anyway... what do you do? Be honest with yourself.

  • Economics... (Score:4, Insightful)

    by blahplusplus (757119) on Thursday October 27, 2011 @03:07AM (#37852900)

    ... 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.

    • Re:Economics... (Score:5, Insightful)

      by Hognoxious (631665) on Thursday October 27, 2011 @03:24AM (#37852958) Homepage Journal

      Actually plenty of economists did predict the crash. It's just that the only way to prevent it would have been to stop the party, and any politician who'd done so would have been replaced by someone who'd allow the credit-fueled binge to continue.

      • Quite true, there were plenty of Economists who predicted the crash - the only problem is that you can't force people to listen. So instead those who predicted the crash (and the minority who listened to them) saved up and prepared so that they wouldn't get stuck losing their home when everything went bust.
        • by voss (52565) on Thursday October 27, 2011 @07:22AM (#37853850)

          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.

      • "Actually plenty of economists did predict the crash"

        Crashes are inherent to the nature of capitalist society and has been known about since the time of marx and even before then. Just because you can predict something doesn't say anything about the political foundations of the institutions and social relations in general. I can use science to predict the whether tomorrow will be sunny, but that is different from human societies which are organized on the basis of legal and political structures. Money, p

      • Re:Economics... (Score:5, Informative)

        by Jane Q. Public (1010737) on Thursday October 27, 2011 @04:46AM (#37853246)
        Not entirely true. Ron Paul, who until now has always been pushed aside as irrelevant to the party, predicted it clearly and concisely. He predicted what would happen, approximately when, and exactly why. And all three of those came to be. ("When" was of course inexact... nobody is claiming clairvoyance here.)

        More to the point, he predicted what would happen afterward, which has also been coming to pass.

        Peter Schiff, who is also of the Austrian school of economics, publicly predicted the same, back in 2006-2007. There is a great YouTube video of him arguing with Keynesians who were all basically saying "The economy is fine!"

        But of course, he's not a politician. Yet.
        • Economists mainly ignore the role of money and debt, they are blind to its influence as they see the role of loans as merely moving spending power between individuals. But 12 economists [uni-muenchen.de] have been identified as publishing models before the crisis that predicted it, and all were found to emphasise the role that credit plays in determining economic performance.

          The blindness to the role of credit is the biggest reason why economic models have to be continually recalibrated. And why such modelling never allows

        • by devent (1627873)

          I watched some of P.S. videos on youtube and he is just a right wing economist, the same idiotic claims: lower taxes, decrease government, etc. pp.

          That he was right about the crisis, so big deal. I would think all people knew about that crisis was comming, the bankers, the traders, the politicians. If you really want to know what happened in the decade before the crisis, I would suggest you to watch some videos from William K. Black, for example: http://www.youtube.com/watch?v=Rz1b__MdtHY [youtube.com]

        • Not entirely true. Ron Paul, who until now has always been pushed aside as irrelevant to the party, predicted it clearly and concisely. He predicted what would happen, approximately when, and exactly why. And all three of those came to be. ("When" was of course inexact... nobody is claiming clairvoyance here.)

          One could just as easily point out that Marxist economists predict there will be an economic recession every few years -- but "when" is inexact. They can point out a number of facts about the state of the economy which are certainly true and make deductions that are controversial from those facts.

          The point being, at any given moment, there will be different economists with different ideologies making different predictions from more or less the same data, and if you accept enough fuzziness in the predictions

          • "One could just as easily point out that Marxist economists predict there will be an economic recession every few years -- but "when" is inexact."

            Not the same at all. We're talking about prediction that the housing bubble would crash within a couple of years, and recognition of the sub-prime debacle, etc. Very specific stuff. Not at all comparable to some generalized prediction of gloom and doom that must happen at some vague time in the future.

        • by wolfemi1 (765089)
          I'm really sick of this trope. Here:

          http://consultingbyrpm.com/blog/2009/12/krugman-did-identify-the-housing-bubble-in-2005.html [consultingbyrpm.com]

          This links to a Krugman article from 2005 (notably pre-Schiff) when he not only called out the housing bubble, but assumed that it had been known about for some time.

          Sure, CERTAIN economists have been wrong about things, but no school has a monopoly on predicting the bubble.

          • That may be so, but earlier, in 2000-2001, Krugman was happily cheering on the artificially low interest rates that eventually led to the housing bubble. He even went so far as to specifically say that the outrageously low rates on housing were a good thing and would help the economy.

            It's nice that Krugman eventually got it right, but he was a bit slow on the uptake, having actively encouraged the bad behavior in the first place.
      • Re:Economics... (Score:4, Insightful)

        by ErroneousBee (611028) <neil:neilhancock@co@uk> on Thursday October 27, 2011 @09:08AM (#37854526) Homepage

        Actually, economists predict crashes all of the time.

        • Some are perma-bears, they always predict a crash. They do predict the crashes that happen, but they also predict loads that dont.
        • Some are perma-bulls, they always predict a crash, but not just yet.
        • And some try and give useful forecasts, but get it wrong most of the time because markets go through chaotic phases, and politicians make random moves.

        For instance, right now there are some people predicting a UK housing market crash of about 20% in the next year. If theres no crash this year, they'll just move forwards to next year. Eventually they'll be right, and will parade their insight for all to see.

  • Wow (Score:5, Funny)

    by Hognoxious (631665) on Thursday October 27, 2011 @03:17AM (#37852936) Homepage Journal

    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".

    • I don't think this is necessarily due to differences in initial conditions. Even in the models were algebraic (i.e. not differential equations), having too many parameters and not enough data would lead to wildly erroneous predictions. You would be effectively fitting the model to noise. When the model does involve derivatives, it might be possible for the system to exhibit chaotic behavior, but that is not a necessity. It could be asymptotically or neutrally stable, but the prediction of the stable points
    • 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!

      Not what the article said. The article said: If a model can be parameterized, and there are so many possible parameters that the model can be made to match any past data by tweaking the parameters in many different ways, then you will end up with a model that doesn't predict the future.

      In mathematics, if you have any set of n points yi = f (xi), then it is possible to find a polynomial of degree n-1 that fits these points exactly, and it is possible to find many polynomials of higher degrees fitting thes

      • by Arlet (29997)

        It's not what the article says, but it's not wrong either. Chaos plays a significant role in the real economic and financial world.

        Subtle changes, such as whether Alan Greenspan put a comma before or after a word could make the difference between a good day and a bad day on the stock market.

  • by mbkennel (97636) on Thursday October 27, 2011 @03:19AM (#37852940)

    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.

    • by mbkennel (97636)

      Sorry for self-responding.

      I read the original linked article.

      "Carter had initially used arbitrary parameters in his perfect model to generate perfect data, but now, in order to assess his model in a realistic way, he threw those parameters out and used standard calibration techniques to match his perfect model to his perfect data. It was supposed to be a formality--he assumed, reasonably, that the process would simply produce the same parameters that had been used to produce the data in the first place. But

      • by FhnuZoag (875558)
        Yeah, this article is a pretty big duh for me. But well, guys, the whole field of statistics is built around finding proper ways to calibrate models. Economic models are maybe always wrong if you do things stupidly like these guys do, but there are alternative ways...
    • The notion that "nobody" saw it is simply propagandistic truthiness baloney.

      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.

      An enormous number of people had a lucrative interest in the bubble not stopping. (Even of you do accept the ludicrous notion that small number of people *could* have stopped it.) Real estate agents whose commissions were going th

      • by drsmithy (35869)

        It was Joe Sixpack who watched the stocks in his retirement portfolio boom. It was the Jpe Sixpack stockholders and employees of the banks, real estate brokers, home improvement stores, etc... etc...

        And it was Joe Sixpack who didn't have the insider knowledge to see what was coming and now owes $400k on a house value at $150k.

        • by Arlet (29997)

          You didn't need insider knowledge, just a healthy dose of common sense.

      • by Attila Dimedici (1036002) on Thursday October 27, 2011 @07:59AM (#37854044)

        Even of you do accept the ludicrous notion that small number of people *could* have stopped it.

        Actually, the notion is that, if a relatively small number of people had not prevented it, a somewhat larger group of people could have acted to ameliorate the consequences of the bubble popping.
        The people who should be held accountable for the bubble and the negative consequences of it popping are not (at least for the most part) the bankers. The politicians who started the bubble inflating and then when other politicians tried to let some air out of the bubble used their positions to prevent that are the ones who should be held accountable. There are, also, bureaucrats at Fanie Mae and Freddie Mac who should be held to blame as well. Most of the bankers, while they were happily raking in the profits from the bubble, were not in a position to change the dynamics of it.
        What I find most interesting about those who blame the bankers for the situation is that they tend to favor Democrats, just like the bankers most involved in the financial meltdown.

    • by drnb (2434720) on Thursday October 27, 2011 @04:52AM (#37853276)

      Many, many, many people saw the economic collapse.

      A newsletter from an economics professor and CNBC financial commentator:
      "Thursday, February 28, 2008 ... 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 [peternavarro.com]

      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.

    • by antifoidulus (807088) on Thursday October 27, 2011 @06:31AM (#37853652) Homepage Journal
      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.

      Which actually brings up the real problem, bubbles are actually pretty easy to spot, but almost impossible to time. Like you said, a lot of people saw the bubble, but almost nobody predicted when it would actually burst(a couple did, but the % is so low that it can be chalked up to random chance). You short too early and you end up in a bind as your trades are called in, too late and you missed all the fun.

      For a current bubble, look at the Japanese yen. There is no way the yen should be as high as it is right now, there is obviously a lot of leveraging going on keeping the currency much stronger than it should be. The currency will snap back, and probably pretty violently due to the massive amount of leveraging, but every single "prediction" I have read of when this will occur has been wrong.
    • by argStyopa (232550) on Thursday October 27, 2011 @07:18AM (#37853838) Journal

      Bush's budget issued in 2001 warned that Fannie Mae and Freddie Mac were overleveraged, and said that they needed tighter controls, oversight, and a host of reforms because "their failure could cause strong repercussions in financial markets, affecting federally insured entities and economic activity".

      D Senator Chris Dodd threatened to filibuster to block it.
      D Congressman Barney Frank (who was sleeping with a senior exec at Fannie Mae, coincidentally) claimed the subprime system at Fannie Mae was "fundamentally sound" and the idea it needed reforms "inane".

      Nobody saw this coming? No, it was pretty clearly that some people saw it coming but the system is so totally politicized that anything anyone is predictably responded-to according to the following algorithm:
      1) who said it?
      2) how is he affiliated?
      3) are my affiliations in opposition?
      4) if they are, I oppose whatever was said.

      Really, that's all that's left of intellect inside the beltway.

      • Bush's budget issued in 2001 warned that Fannie Mae and Freddie Mac were overleveraged, and said that they needed tighter controls, oversight, and a host of reforms...

        I would love to see a source for that.

        I do personally recall Bush campaigning in 2004 based on the increase in home ownership. Here are some direct quotes: link [thinkprogress.org]
        (think what you will of the linked source, it was the first I found in google with actual quotes)
  • Very few? (Score:2, Interesting)

    by Anonymous Coward

    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.

  • by rmstar (114746) on Thursday October 27, 2011 @03:21AM (#37852950)

    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 [businessinsider.com] for some acknowledgement of which brand of economics has been right during the last few years. Here is another account [newyorker.com], 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 [nytimes.com].

    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...

  • 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

  • by maxwell demon (590494) on Thursday October 27, 2011 @03:35AM (#37853002) Journal

    From the article:

    "If you had to readjust the constant in Newton's law of gravity every time you got out of bed in the morning in order for it to agree with your scale, it wouldn't be much of a law But in finance they just keep on recalibrating and pretending that the models work."

    Wait ... you are saying the growing number on my bath scale isn't because the constant of gravity is growing? :-)

  • 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.
  • by yacc143 (975862)

    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

  • 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.
    • by jcr (53032)

      Economics tries to take the veneer of science by using a lot of mathematics.

      Just like Astrology.

      -jcr

  • 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 a

    • Well, Carter's argument is sometimes wrong. I do Bayesian calibration of computer models, and with some models the maximum a posteriori estimate, or the posterior mean, is consistently very different from the "true" parameter values (in a perfect model simulation study). This is basically a combination of non-identifiability in the model combined with insufficiently informative priors. It's hard to do anything about this, and it's a problem if the estimated and "true" parameter values lead to very differ

  • by ravenshrike (808508) on Thursday October 27, 2011 @04:01AM (#37853080)

    "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.
  • All models are wrong (Score:5, Interesting)

    by Bud (1705) on Thursday October 27, 2011 @04:08AM (#37853114)

    "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

  • 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

  • ...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

  • by paulpach (798828) on Thursday October 27, 2011 @08:48AM (#37854360)
    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 [youtube.com]. 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 [youtube.com], 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.

Aren't you glad you're not getting all the government you pay for now?

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