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Exactly. I'm also doubtful that taking a more real science approach to economics (hypothesis -> experiment -> result -> rule) will work. It's a science about so

by jevgeni 11y ago

Exactly. I'm also doubtful that taking a more real science approach to economics (hypothesis -> experiment -> result -> rule) will work. It's a science about societies and societies change. For example, the financial markets are the most measured markets out there, with the most microscopic details recorded. One interesting thing that happens after financial crashes are crises of theory. For example prior to 1987 American options didn't show [volatility smiles](https://en.wikipedia.org/wiki/Volatility_smile https://en.wikipedia.org/wiki/Volatility_smile). After the crash the smiles appeared, making the markets a very different place. The same happened after Subprime and the LIBOR scandal, when the notion of a "risk-free rate" suddenly disappeared: governments now had to compensate for their default risk and market quotes were unreliable. Academics still struggle with the whole notion, although it seems that the current practice is settling around OIS discounting and CVA/DVA. The point is, rules change. Hence in economics you can't just empirically deduce a rule and let it be, you constantly have to recalibrate it.

sklogic 11y ago
Only the real science approach ever works. If your "science" is using any other approach, it is not a science, period. And there is a proper, scientific approach in the economics: behavioural economics. Instead of hand waving about some "ideal", non-existant agents acting fully rationally upon a 100% correct and impossible information available, as the classic bullshit economics does, the proper, behavioural economics starts with studying the real individuals behaviour (which is very much doable, no matter what the others are saying), and only then drawing conclusions about the herd behaviour in a statistical scale.
- JupiterMoon 11y ago
  Isn't his point that there is a sort of uncertainty principle in economics? For example when you study people they behave differently and furthermore as soon as they think that you think that they will behave in a certain way they may well behave differently -- especially if there is financial gain at stake for changing their behaviour. As you say this all derives from the biggest problem with all the social sciences people are not rational actors and any mathematical model has to encapsulate real human behaviour.
  - TuringTest 11y ago
    > For example when you study people they behave differently and furthermore as soon as they think that you think that they will behave in a certain way they may well behave differently That's not an inherent limitation for applying science. Signal theory has models that represent circuits with feedback loops, where the output ; similar models could be developed to study people who know are being studied. Also, if you use data collections that were compiled for other purposes, you can study the behavior of people who don't know are participating un such study. Big data is essentially that. > As you say this all derives from the biggest problem with all the social sciences people are not rational actors and any mathematical model has to encapsulate real human behaviour. There are theories that don't assume perfect rational agents, and can still predict behavior by studying the common human bias. See the work of behavioral economist Dan Ariely for an academic approach.
- jevgeni 11y ago
  I'm sorry, but I don't want to debate your personal definition of the word "science". Per convention economics is called a "social science" and that's a convention I will adhere to. In addition to what JupiterMoon says, I'd say that individual behaviour was never a real problem in economics. A lot of the theories are built on stupid assumptions about rational behaviour, but that's just it: you always can change the assumptions and see what happens. Behavioural economics is just that. The real problem of economics is scale and inability to cleanly experiment on that scale. To imply any kind of large scale "herd" behaviour from individual behaviour would still require a tonne of a priori, non-falsifiable assumptions. Even if the assumptions can be shown to be valid now, it would be impossible to prove that they are stable and valid for a long period of time.
- icebraining 11y ago
  Yet, the "spherical cow in a vacuum" expression came from a hard science. Einstein didn't exactly develop his relativity theories by making measurements and drawing statistical conclusions either. Pure theory has its place in science, as long as one is honest about its limitations.
  - sklogic 11y ago
    Relativity theory fits well into this description. It (the special relativity) was derived from a formal attempt to unify classical mechanics and Maxwell electrodynamics, which was only possible if you ditch the Galilean relativity. Both classical mechanics and electrodynamics, in turn, came from a huge body of experimental data. General relativity is a different thing, it was a pure hypothesis, an extrapolation of the simplest possible generalisation of the special relativity [1]. And it held this hypothesis status up until it was sufficiently confirmed by the incoming experimental data. Before that, a multitude of alternative hypotheses existed which had the same numerical predictions covering the available experimental data (e.g., https://en.wikipedia.org/wiki/Anatoly_Logunov#Relativistic_theory_of_gravitation https://en.wikipedia.org/wiki/Anatoly_Logunov#Relativistic_t...). So, yes, it's important to distinguish theory from a hypothesis. [1] this "simplest possible generalisation" method works most of the time, but not always, so it's mostly valid to do so in the hard sciences, and should never be used as a justification for hand waving in the social sciences.
TheOtherHobbes 11y ago
Astrology has also developed over a couple of millennia. The fact that some people use astrology to play the markets, and seem to get results that are as good as those of economic theory, says a lot about both. Economics is entirely a faith-based pseudo-science, which plays the same role in modern culture as the nonsensical theistic "explanations" of the world put out by the Church played in medieval times. It's a form of political/rhetorical persuasion and social control, with an implied morality that's never seriously questioned. Even if you accept that it's politically descriptive and not politically predictive, it still fails. It's not a science in any useful way - it simply pretends to be one, because that makes it appear more authoritative. The real scandal for me is the fact that skeptics and debunkers like the amazing Randi have spent so much time and energy on trivial topics like the paranormal, while leaving the epic intellectual fraud and imposture behind mainstream economic theory unchallenged.
- justincormack 11y ago
  Broadly agree, but I don't entirely blame the economists, the politicians need justifications for what they do, and appealing to economics is a great one. Most political movements that have been successful have had some economic backup (eg Friedman and the libertarian right in the 1980s). In practise much of policy is just trying to change stuff using financial incentives, which in many cases has unintended consequences or is too complex.
- nshepperd 11y ago
  Doesn't economic theory say that you can't play the market? That's confusing.
  - jevgeni 11y ago
    Shhhhh, that would require to actually be familiar with it.
  - roymurdock 11y ago
    Nobody believes that markets are strong-form efficient. There is and always will be differences in information between players in the market. It's just a useful way to talk and think about how a market with perfect information would behave. That's why semi-strong and weak form efficiency are usually taught in the same lecture :)

by jevgeni 11y ago

sklogic 11y ago

Only the real science approach ever works. If your "science" is using any other approach, it is not a science, period. And there is a proper, scientific approach in the economics: behavioural economics. Instead of hand waving about some "ideal", non-existant agents acting fully rationally upon a 100% correct and impossible information available, as the classic bullshit economics does, the proper, behavioural economics starts with studying the real individuals behaviour (which is very much doable, no matter what the others are saying), and only then drawing conclusions about the herd behaviour in a statistical scale.

JupiterMoon 11y ago
Isn't his point that there is a sort of uncertainty principle in economics? For example when you study people they behave differently and furthermore as soon as they think that you think that they will behave in a certain way they may well behave differently -- especially if there is financial gain at stake for changing their behaviour. As you say this all derives from the biggest problem with all the social sciences people are not rational actors and any mathematical model has to encapsulate real human behaviour.
- TuringTest 11y ago
  > For example when you study people they behave differently and furthermore as soon as they think that you think that they will behave in a certain way they may well behave differently That's not an inherent limitation for applying science. Signal theory has models that represent circuits with feedback loops, where the output ; similar models could be developed to study people who know are being studied. Also, if you use data collections that were compiled for other purposes, you can study the behavior of people who don't know are participating un such study. Big data is essentially that. > As you say this all derives from the biggest problem with all the social sciences people are not rational actors and any mathematical model has to encapsulate real human behaviour. There are theories that don't assume perfect rational agents, and can still predict behavior by studying the common human bias. See the work of behavioral economist Dan Ariely for an academic approach.
jevgeni 11y ago
I'm sorry, but I don't want to debate your personal definition of the word "science". Per convention economics is called a "social science" and that's a convention I will adhere to. In addition to what JupiterMoon says, I'd say that individual behaviour was never a real problem in economics. A lot of the theories are built on stupid assumptions about rational behaviour, but that's just it: you always can change the assumptions and see what happens. Behavioural economics is just that. The real problem of economics is scale and inability to cleanly experiment on that scale. To imply any kind of large scale "herd" behaviour from individual behaviour would still require a tonne of a priori, non-falsifiable assumptions. Even if the assumptions can be shown to be valid now, it would be impossible to prove that they are stable and valid for a long period of time.
icebraining 11y ago
Yet, the "spherical cow in a vacuum" expression came from a hard science. Einstein didn't exactly develop his relativity theories by making measurements and drawing statistical conclusions either. Pure theory has its place in science, as long as one is honest about its limitations.
- sklogic 11y ago
  Relativity theory fits well into this description. It (the special relativity) was derived from a formal attempt to unify classical mechanics and Maxwell electrodynamics, which was only possible if you ditch the Galilean relativity. Both classical mechanics and electrodynamics, in turn, came from a huge body of experimental data. General relativity is a different thing, it was a pure hypothesis, an extrapolation of the simplest possible generalisation of the special relativity [1]. And it held this hypothesis status up until it was sufficiently confirmed by the incoming experimental data. Before that, a multitude of alternative hypotheses existed which had the same numerical predictions covering the available experimental data (e.g., https://en.wikipedia.org/wiki/Anatoly_Logunov#Relativistic_theory_of_gravitation https://en.wikipedia.org/wiki/Anatoly_Logunov#Relativistic_t...). So, yes, it's important to distinguish theory from a hypothesis. [1] this "simplest possible generalisation" method works most of the time, but not always, so it's mostly valid to do so in the hard sciences, and should never be used as a justification for hand waving in the social sciences.

TheOtherHobbes 11y ago

Astrology has also developed over a couple of millennia. The fact that some people use astrology to play the markets, and seem to get results that are as good as those of economic theory, says a lot about both. Economics is entirely a faith-based pseudo-science, which plays the same role in modern culture as the nonsensical theistic "explanations" of the world put out by the Church played in medieval times. It's a form of political/rhetorical persuasion and social control, with an implied morality that's never seriously questioned. Even if you accept that it's politically descriptive and not politically predictive, it still fails. It's not a science in any useful way - it simply pretends to be one, because that makes it appear more authoritative. The real scandal for me is the fact that skeptics and debunkers like the amazing Randi have spent so much time and energy on trivial topics like the paranormal, while leaving the epic intellectual fraud and imposture behind mainstream economic theory unchallenged.

justincormack 11y ago
Broadly agree, but I don't entirely blame the economists, the politicians need justifications for what they do, and appealing to economics is a great one. Most political movements that have been successful have had some economic backup (eg Friedman and the libertarian right in the 1980s). In practise much of policy is just trying to change stuff using financial incentives, which in many cases has unintended consequences or is too complex.
nshepperd 11y ago
Doesn't economic theory say that you can't play the market? That's confusing.
- jevgeni 11y ago
  Shhhhh, that would require to actually be familiar with it.
- roymurdock 11y ago
  Nobody believes that markets are strong-form efficient. There is and always will be differences in information between players in the market. It's just a useful way to talk and think about how a market with perfect information would behave. That's why semi-strong and weak form efficiency are usually taught in the same lecture :)