faulker020

OK, I promised a more pompous/wanky followup to my last post about "theory vs. data", so here it is. What's really going on in econ? Here are my guesses. First of all, there's a difference between empirics and empiricism. Empirics is just the practice of analyzing data. Empiricism is a philosophy - it's about how much you believe theories in the absence of data. You can be a pure theorist and still subscribe to empiricism - you just don't believe your theories (or anyone else's theories) until they've been successfully tested against data. Of course, empiricism isn't a binary, yes-or-no-thing, nor can it be quantitatively measured. It's just a general idea. Empiricism can encompass things like having diffuse priors, incorporating model uncertainty into decision-making, heavily penalizing Type 1 errors, etc. Traditionally, econ doesn't seem to have been very empiricist. Economists had strong priors. They tended to believe their theories in ...

There has naturally been a bit of pushback against empiricist triumphalism in econ. Here are a couple of blog posts that I think represent the pushback fairly well, and probably represent some of the things that are being said at seminars and the like. First, Ryan Decker has a post about how the results of natural experiments give you only limited information about policy choices: [T]he “credibility revolution”...which in my view has dramatically elevated the value and usefulness of the profession, typically produces results that are local to the data used . Often it's reasonable to assume that the "real world" is approximately linear locally, which is why this research agenda is so useful and successful. But...the usefulness of such results declines as the policies motivated by them get further from the specific dataset with which the results were derived. The only way around this is to make assumptions about the linearity of the “real world”[.] (emphasis mine) Great po...

Brad DeLong : [I]t is, I think, worth stepping back to recognize how very little is left of the original efficient market hypothesis project, and how far the finance community has drifted--nay, galloped--away from it, all the while claiming that it has not done so...  The original EMH claim was...[y]ou can expect to earn higher average returns [than the market], but only by taking on unwarranted systematic risks that place you at a lower expected utility...  [But f]inance today has given up any preference that the--widely fluctuating over time--expected systematic risk premium has anything to do with [risk]...It is very, very possible for the average person to beat the market in a utility sense and quite probably in a money sense by [buying portfolios of systematically mispriced assets]. DeLong cites the interesting new paper " Mispricing Factors ", by Robert Stambaugh and Yu Yuan. The paper puts sentiment-based mispricing into the form of a traditional factor model. Is DeLon...

If you want to understand Whig History , just look at the difference between the traditional European and the Disney versions of The Little Mermaid  (spoiler alert!). Up until the end, they're pretty much the same - the mermaid dreams of love, and makes a deal with the evil witch, but she fails to get the prince to kiss her, and as a result she forfeits her life to the witch. In the European version, the mermaid dies and turns into sea foam, her dreams dashed. In the American version, however, the mermaid and the prince simply stab the witch in the chest  with a broken bowsprit, and everyone lives happily ever after. I think this difference is no coincidence. Around 1800, history had a structural break. Suddenly, the old Malthusian cycle of boom and bust was broken, and living standards entered a rapid exponential increase that is still going today. No wonder Americans love the Hollywood ending. In an economic sense, that's all we've ever really known.  So Whig History ...

I've noticed an interesting desire, especially on the political left, to want to use loans as a means of redistribution. The idea is that lenders should be willing to make loans to poor people when the risk-return tradeoff is worse than for loans to rich people. This could mean, for example, loaning money to high-default-risk poor borrowers at the same interest rate as to low-default-risk rich borrowers. Or it could mean extending loans to poor people whose perceived default risk would previously have prevented them from getting loans. The notion that this is "fair" - or that lenders "owe" it to poor people to give them favorable lending terms - pervades such works as David Graeber's Debt: The First 5000 Years . A more recent example is Cathy O'Neil's recent post on Big Data and disparate impact in lending: Did you hear about this recent story whereby Facebook just got a patent to measure someone’s creditworthiness by looking at who their friends ar...

Ten years ago, two economic theorists, Faruk Gul and Wolfgang Pesendorfer, wrote an essay called " The Case for Mindless Economics ". The essay pushes back against the enthusiasm for neuroeconomics and behavioral economics. It's a very interesting read, both for people interested in philosophy of science, and anyone who wants to know how economists think about what they do. (Before you read this post, consider reading the whole essay, because there's lots in there that I gloss over.) Gul and Pesendorfer don't discount the possibility that neurological and psychological research can be useful in economics. They write: Neuroeconomics goes beyond the common practice of economists to use psychological insights as inspiration for economic modeling or to take into account experimental evidence that challenges behavioral assumptions of economic models. Neuroeconomics appeals directly to the neuroscience evidence to reject standard economic models or to question economic ...

"Say it wasn't you" - Shaggy On my last post, I wrote that "RBC gaslighting knows no shame." To which Steve Williamson said "You're a real meany with the poor RBC guys." Which reminds me that it's been a while since I wrote a gratuitous, cruel RBC-bashing post! (Fortunately the "poor RBC guys" all have high-paying jobs, secure legacies, and widespread intellectual respect that sometimes includes Nobel Prizes, so a mean blog post or two from lil' old me is unlikely to cause them any harm.) Anyway, I used the word " gaslighting ", but in case you don't know what it means, here's the def'n: Gaslighting or gas-lighting is a form of mental abuse in which information is twisted or spun, selectively omitted to favor the abuser, or false information is presented with the intent of making victims doubt their own memory, perception, and sanity. Basically, this is what Shaggy advises Rikrok to do in the famous 1990s s...