Home > Uncategorized > Uncertainty and “trailing clouds of vagueness”

Uncertainty and “trailing clouds of vagueness”

from Lars Syll

We live in a world permeated by unmeasurable uncertainty — not quantifiable stochastic risk — which often forces us to make decisions based on anything but ‘rational expectations.’ Our expectations are most often based on the confidence or ‘weight’ we put on different events and alternatives, and the ‘degrees of belief’ on which we weigh probabilities often have preciously little to do with the kind of stochastic probabilistic calculations made by the rational agents as modelled by ‘modern’ social sciences. Often we simply do not know.

So why do economists, companies and governments continue with the expensive, but obviously ratherworthless, activity of trying to forecast/predict the future?

A couple of years ago yours truly was interviewed by a public radio journalist working on a series on Great Economic Thinkers. We were discussing the monumental failures of the predictions-and-forecasts-business. But — the journalist asked — if these overconfident economists with their ‘rigorous’ and ‘precise’ mathematical-statistical-econometric models are so wrong again and again — why do they persist wasting time on it?

In a very personal discussion of uncertainty and the hopelessness of accurately modeling what happens in the real world, Nobel laureate Kenneth Arrow  comes up with what is probably one of the most plausible reasons:

It is my view that most individuals underestimate the uncertainty of the world. This is almost as true of economists and other specialists as it is of the lay public. To me our knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness … Experience during World War II as a weather forecaster added the news that the natural world as also unpredictable. cloudsAn incident illustrates both uncertainty and the unwilling-ness to entertain it. Some of my colleagues had the responsi-bility of preparing long-range weather forecasts, i.e., for the following month. The statisticians among us subjected these forecasts to verification and found they differed in no way from chance. The forecasters themselves were convinced and requested that the forecasts be discontinued. The reply read approximately like this: ‘The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.’

  1. January 11, 2022 at 1:32 am

    The last line explaining why “the general” wants worthless forecasts is priceless!

    • Charlie Thomas aKa Cacciato
      January 11, 2022 at 2:14 am

      priceless, any e-4 in Vietnam new the generals were worthless …

      • Charlie Thomas aKa Cacciato
        January 11, 2022 at 2:15 am

        knew not new

  2. Dave Raithel
    January 11, 2022 at 3:42 am

    “However, he needs them for planning purposes.” On account he makes the mistake of assuming there will be weather.

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  3. Gerald Holtham
    January 12, 2022 at 4:44 pm

    A common approach in that situation is to produce different scenarios so the general could plan what he would do in different circumstances. Given what people knew about forecasting weather up to Arrow’s time, at a given place and season there would be certain sorts of weather you could reasonably ignore, narrowing the options down to a few possibilities. Then it depends on how flexible the general could be in his deployment. If he had to deploy before the weather clarified his best option is probably to find the deployment that has the least bad outcome across all the scenarios. The maxi-min solution is safer than gambling on the best outcome. As usual the issue is not whether we know enough to be sure of getting it right – the answer is we never do. The practical issue is how you make the best use of the information at your disposal. The general cannot refuse to take decisions on the grounds that the future contains knightian uncertainty – any more than the economic policy maker can do so. As a positive study, economics should be looking at how people do in fact deal with such uncertain situations rather than assuming they find their way to an “equilibrium”.

    • Vladimir Masch
      January 14, 2022 at 11:23 pm

      Gerald, the general may be somewhat optimistic. You seem not to know even about the Hurwicz criterion of Decision Analysis, which allows that. But each of 7 criteria of that discipline allow comparison of strategy candidates only at one level of optimism – minimax at 0, math expectation at 1. Insufficient. They are replaced by 7 new criteria of DA, each allowing simultaneous comparison at the whole 0, 1 range of optimism. They are the last part of my Risk-Constrained Optimization. See short summary in Section 2.1 of my Challenge paper, 64, 2, 100-116. June 21. References there.

  4. Edward Ross
    January 12, 2022 at 10:50 pm

    Reply to Gerald Holtham “As a positive study, economics should be looking at how people do in fact deal with such uncertain situations rather than assuming they find their way to an ‘equilibrium”. as a non academic this reflects the importance of the concept of critical realism rather than irrelevant axiomatic nonsense. Ted

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