Econophysics

20 August, 2018 at 15:15 | Posted in Economics | 1 Comment

Unfortunately, nothing is more dangerous than dogmas donned with scientific feathers. The current crisis might offer an excellent occasion for a paradigm
change, previously called for by prominent economists like John Maynard Keynes, Alan Kirman and Steve Keen. They have forcefully highlighted the shortcomings
and contradictions of the classical economictheory, but progress has been slow. The task looks so formidable that some economists argue that it is better to stick with the implausible but well-corseted theory of perfectly rational agents than to venture into modelling the infinite number of ways agents can be irrational.

miracle_cartoonPhysicists, however, feel uncomfortable with theories not borne out by (or even blatantly incompatible with) empirical data. But could the methodology of physics really contribute to the much-awaited paradigm shift in economics? …

Econophysics is in fact a misnomer, since most of its scope concerns financial markets. To some economists, finance is a relatively minor subfield and any contribution, even the most significant, can only have a limited impact on economics science at large. I personally strongly disagree with this viewpoint: recent events confirm that hiccups in the financial markets can cripple the entire economy.

From a more conceptual point of view, financial markets are an ideal laboratory for testing several fundamental concepts of economics. Are prices really such that supply matches demand? Are price moves primarily due to news? (The answer to both these questions seem to be clear “no” … As I will try to illustrate, the very choice of the relevant questions, which ultimately leads to a deeper understanding of the data, is often sheer serendipity: more of an art than a science. That intuition, it seems to me, is well nurtured by an education in the natural sciences, where the emphasis is on mechanisms and analogies, rather than on axioms and theorem proving.

Jean-Philippe Bouchaud

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Steven Pinker — a cherry-picking​ Panglossian

20 August, 2018 at 12:50 | Posted in Politics & Society | 3 Comments

 

Why most published research findings are false

19 August, 2018 at 10:45 | Posted in Statistics & Econometrics | Leave a comment

Instead of chasing statistical significance, we should improve our understanding of the range of R values — the pre-study odds — where research efforts operate. Before running an experiment, investigators should consider what they believe the chances are that they are testing a true rather than a non-true relationship. Speculated high R values may sometimes then be ascertained … Large studies with minimal bias should be performed on research findings that are considered relatively established, to see how often they are indeed confirmed. I suspect several established “classics” will fail the test.

homer-stats-quoteNevertheless, most new discoveries will continue to stem from hypothesis-generating​ research with low or very low pre-study odds. We should then acknowledge that statistical significance testing in the report of a single study gives only a partial picture, without knowing how much testing has been done outside the report and in the relevant field at large. Despite a large statistical literature for multiple testing corrections, usually it is impossible to decipher how much data dredging by the reporting authors or other research teams has preceded a reported research finding. Even if determining this were feasible, this would not inform us about the pre-study odds. Thus, it is unavoidable that one should make approximate assumptions on howmany relationships are expected to be true among those probed across the relevant research fields and research designs.​

John P. A. Ioannidis

The rational expectations hoax

18 August, 2018 at 16:29 | Posted in Economics | Leave a comment

how-many-irrational-assumptions-are-needed-for-economist-to-use-rational-expectationsA lot of mainstream economists still stick with ‘rational expectations’ since they think it has not yet been disconfirmed. They are, of course, entitled to have whatever views they like — after all, it is, to say the least, difficult to empirically disconfirm the non-existence of Gods …

But for the rest of us, let’s see how rational expectations really fare​ as an empirical assumption. Empirical efforts at testing the correctness​​s of the hypothesis have​​ resulted in a series of empirical studies that have more or less concluded that it is not consistent with the facts. In one of the more well-known and highly respected evaluation reviews made, Michael Lovell (1986) concluded:

it seems to me that the weight of empirical evidence is sufficiently strong to compel us to suspend belief in the hypothesis of rational expectations, pending the accumulation of additional empirical evidence.

And this is how Nikolay Gertchev summarizes studies on the empirical correctness of the hypothesis:

More recently, it even has been argued that the very conclusions of dynamic models assuming rational expectations are contrary to reality: “the dynamic implications of many of the specifications that assume rational expectations and optimizing behavior are often seriously at odds with the data” (Estrella and Fuhrer 2002, p. 1013). It is hence clear that if taken as an empirical behavioral assumption, the RE hypothesis is plainly false; if considered only as a theoretical tool, it is unfounded and self-contradictory​.

For more on the issue, permit me to self-indulgently recommend reading my article Rational expectations — a fallacious foundation for macroeconomics in a non-ergodic world in Real-World Economics Review no. 62.

Inequality perspectives

18 August, 2018 at 16:03 | Posted in Varia | 1 Comment

sassy

“I never learned maths, so I had to think”

17 August, 2018 at 20:54 | Posted in Economics | 2 Comments

Professors may find themselves ill-prepared for the macro classroom. To become academics they had to answer erudite questions posed by more senior members of the discipline. To become good teachers of introductory macro, they have to give clear answers to muddled students. That requires an intuitive feel for the subject. It is not enough to crank through the equations.

rowe Indeed, Mr Rowe attributes part of his success as a teacher to his shortcomings as a mathematician. He quotes Joan Robinson, another clear expositor of macroeconomics: “I never learned maths, so I had to think.” Because the answers did not leap out at him from the equations, he had to dwell on the economic behaviour underneath the algebra.

Macroeconomics is difficult to teach partly because its theorists (classical, Keynesian, monetarist, New Classical and New Keynesian, among others) disagree about so much. It is difficult also because the textbooks disagree about so little.

The Economist

On tour

14 August, 2018 at 12:35 | Posted in Economics, Varia | Leave a comment

Touring again. Regular blogging to be resumed during the weekend.

Easterlin’s paradox or why economic growth does not make us happier

12 August, 2018 at 16:02 | Posted in Economics | 3 Comments

In Easterlin’s (1974) seminal paper, he finds that within any one country, in cross sectional studies, there was a strong correlation between income and happiness. One would easily conclude that money can buy happiness. However, looking at a cross section of countries, one comes to a different conclusion …

For 10 of the 14 countries surveyed, the happiness ranking is about the same, even though the income per capita changes by a factor of 30 from $140 to $2,000 …

easterlinThe finding of strong correlation between income and happiness disappears when comparisons are made across countries. Similarly, there is no correlation between happiness and income in the long run within a single country … Easterlin (2001) cites several studies which show that, despite tremendous increases in GNP per capita, the level of happiness in European and Latin American has remained virtually constant over decades.

The startling implication of these empirical findings is that the stress being placed on economic growth is entirely misplaced. Growth has no clear relation to happiness. The profession of economics, as well as policy makers all over the world are directly threatened by these findings, which suggest radical changes in how to organise economic affairs …

The implicit proposition of utility theory that the sole route to happiness is maximisation of consumption contradicts with the empirical evidence: this proposition is true only in the short run. This short run validity creates a dangerous illusion of long run validity; understanding this has dramatic policy implications. If happiness is determined by relative comparisons, then one can achieve greater happiness by reducing inequalities, and also by reducing the standards of living for everyone. This will lower the benchmark and make it easier for everyone on the planet to be happy in comparison with this benchmark.

Asad Zaman & Mehmet Karacuka

So much for value-free economics

12 August, 2018 at 15:28 | Posted in Economics | 1 Comment

Back in 1992, New Jersey raised the minimum wage by 18 per cent while its neighbour state, Pennsylvania, left its minimum wage unchanged. Unemployment in New Jersey should — according to mainstream economics textbooks — have increased relative to Pennsylvania. However, when economists David Card and Alan Krueger gathered information on fast food restaurants in the two states, it turned out that unemployment had actually decreased in New Jersey relative to that in Pennsylvania. Counter to mainstream demand theory we had an anomalous case of a backward-sloping supply curve.

And, of course, all those non-ideological and value-free scientific economists out there were überjoyed and prepared to revise their theories …

jp-imgresI’ve subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole.

David Card

Money in perspective

12 August, 2018 at 13:17 | Posted in Economics | 4 Comments

keWhen the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money-motive at its true value. The love of money as a possession — as distinguished from the love of money as a means to the enjoyments and realities of life — will be recognized for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.

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