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Overconfident economists

from Lars Syll

Worst of all, when we feel pumped up with our progress, a tectonic shift can occur, like the Panic of 2008, making it seem as though our long journey has left us disappointingly close to the State of Complete Ignorance whence we began …

overconfidenceIt often takes years down the Path, but sooner or later, someone articulates the concerns that gnaw away in each of us and asks if the Assumptions are valid …

It would be much healthier for all of us if we could accept our fate, recognize that perfect knowledge will be forever beyond our reach and find happiness with what we have …

Can we economists agree that it is extremely hard work to squeeze truths from our data sets and what we genuinely understand will remain uncomfortably limited? We need words in our methodological vocabulary to express the limits … Those who think otherwise should be required to wear a scarlet-letter O around their necks, for “overconfidence.”

Ed Leamer

Many economists regularly pretend to know more than they do. Often this is a conscious strategy to promote their authority in politics and among policy makers. When economists present their models it should be mandatory that the models have warning labels to alert readers to the limited real-world relevance of models building on assumptions known to be absurdly unreal.

Economics may be an informative tool for research. But if its practitioners do not investigate and make an effort of providing a justification for the credibility of the assumptions on which they erect their building, it will not fullfil its task. There is a gap between its aspirations and its accomplishments, and without more supportive evidence to substantiate its claims, critics like yours truly will continue to consider its ultimate arguments as a mixture of rather unhelpful metaphors and metaphysics.

Nowadays it has almost become a self-evident truism among economists that you cannot expect people to take your arguments seriously unless they are based on or backed up by advanced econometric modelling​. So legions of mathematical-statistical theorems are proved — and heaps of fiction are being produced, masquerading as science. The rigour​ of the econometric modelling and the far-reaching assumptions they are built on is frequently simply not supported by data. This is a dire warning of the need to change direction of economics.

  1. Davidson, Paul
    January 9, 2021 at 9:53 pm

    My response is simple. My response is simple. You can see it in my book entitled quote who’s afraid of John Maynard Keynes?” Where I point out that liquidity is the problem in the 2008 nine financial crisis. For example, market back derivatives were sold by investment bankers as quote as good as cash.” I.e. there perfectly lit perfectly liquid but in order to be perfectly liquid any financial asset has to have a market maker not only to master by the buyers and sellers of the acid, but to assure there is an institutional arrangement to guarantee an orderly movement in market price over time so that the next market price is not very far distant from the last market price. The market maker has to do this not only by matching bulls and bears, but by entering the market himself when he cannot find a portly match for slight movement in the market price. He will have to enter it using his own financial resources to either buy or sell the financial asset to maintain orderliness. See my book signed Paul David why I can. Hey, you’re going away – five minutes. Okay I’m saying here. Okay, I can calm busy

  2. Ikonoclast
    January 10, 2021 at 11:48 am

    All dat bad data is bad, boys. Wat-chya gunna do when it comes for you?

    While critiques remain in words and do not become actions, they are force-less. “Words are wind.” Each of us must look in a mirror and ask “Watch-ya gunna do?” And I don’t mean act like those white supremacist, pro-capitalist idiots who stormed the Capitol. They stormed it to protect a multi-millionarie and then he failed to support them. He had no generals in his pocket, only media. Maybe he thought fake media was real. Most incompetent coup attempt award goes to Donald Trump. Most hypocritical supporting actors award, goes to the Republican Party. Most devious Greek Chorus conductor award goes to Joe Biden. He’s still the tool of the rich capitalist oligarchs.

    “Hegel remarks somewhere that all great world-historic facts and personages appear, so to speak, twice. He forgot to add: the first time as tragedy, the second time as farce.” – Karl Marx, ‘The Eighteenth Brumaire of Louis Bonaparte’.

    Beware with Trump that he does not appear the first time as farce, the second time as tragedy. Nancy Pelosi seems to be aware of this latter possibility. She wants to nail him with impeachment in the last days of his Presidency. Presumably, one reason is to prevent a comeback in 2024. The other apparently is to strip the nuclear football off him.

    But remember bad data is bad, boys.

  3. Jose Sousa
    January 11, 2021 at 11:02 pm

    «the principle of maximum Entropy states that in the absence of better knowledge, a prudent assumption is to assume the probability distribution of a system state to exhibit maximum entropy subject to the constraints of known attributes. This requirement ensures that the assigned distributions do not make unwarranted assumptions. Maximum Entropy approaches are prudent in the sense of avoiding overconfidence and the (mis)use of information that is not actually available» (Perdigão et al., 2020)

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