Don’t believe economic myths. Get the truth!

17 December, 2017 at 20:05 | Posted in Economics | 1 Comment



The Efficient Markets Hypothesis

17 December, 2017 at 15:23 | Posted in Economics | 1 Comment

The really interesting questions about the Efficient Markets Hypothesis — at least when discussed by mainstream economists — usually drown in “the model is the message” pseudoscientific mumbo-jumbo of four-factor models with two mispricing factors being better-performing than three-factor models, blah, blah, blah …

Diane Coyle has a much more accurate view of what it’s all about:

I would defend using the assumption of rational choice as long as one realises that it is not a description of reality.

emhBut there is one area where for 30 years economists – and others – have been making that mistake. That is unfortunately, of course, in the financial markets. Practitioners and policy makers acted as if the strong form of the Efficient Markets Hypothesis held true – in other words that prices instantly reflect all relevant information about the future – even though this evidently defies reality …

I think an honest conventionally-trained economist has to at least acknowledge that we grew intellectually lazy about this. Although we all knew at some level that the rational choice assumption was being made to bear too much weight, very few economists openly challenged its everyday use in justifying public policy decisions. Very few of us put this weight on it in our own work. But not all that many economists challenged its pervasive use in the public policy world …

The financial and economic crisis also spells a crisis for certain areas of economics, or approaches to economics. Financial economics and macroeconomics are particularly vulnerable. They are the subject areas where the consequences of the standard assumptions have been most damaging, because they are actually least valid. Financial market traders are not remotely like Star Trek’s Mr Spock, making rational calculations unaffected by emotion or by the decisions of other people. Macroeconomics – the study of how millions of individual decisions aggregate into economy-wide measures – is essentially ideological. How macroeconomists answer a question like ‘What will be the effect of cutting the budget deficit on growth next year?’ depends on their political views. This is not remotely a scientific area of the discipline. The consensus about macroeconomics during what’s been described as ‘the Great Moderation’ of the 1990s has entirely broken down.

Diane Coyle

Instead of assuming rational expectations and efficient markets to be right, one ought to confront the hypotheses with the available evidence. It is not enough to construct models. Without strong evidence, all kinds of absurd claims and nonsense may pretend to be science. We have to demand more of a justification than a rather watered-down version of “anything goes” when it comes to rationality postulates and markets. If one proposes rationality and efficiency hypotheses one also has to support their underlying assumptions. None is given, which makes it rather puzzling how REH and EMH have become standard modelling assumptions in modern macroeconomics.

We happy few

16 December, 2017 at 20:11 | Posted in Varia | Leave a comment


Big Data Bullshit

16 December, 2017 at 18:14 | Posted in Statistics & Econometrics | Leave a comment


Trickle-down baloney

15 December, 2017 at 23:41 | Posted in Economics | 1 Comment


An unconquerable soul

15 December, 2017 at 19:35 | Posted in Varia | Leave a comment

Great poem that helped Nelson Mandela keep hope alive during 27 years in prison.

Nationalekonom varnar för bostadsbubbla

15 December, 2017 at 15:02 | Posted in Economics | Leave a comment

lasseEn inte helt obekant ekonom uttalar sig här om situationen på dagens bomarknad.

Texas sharpshooter fallacy

14 December, 2017 at 09:21 | Posted in Statistics & Econometrics | Leave a comment

Data clusters are everywhere, even in random data. Someone who looks for an explanation will inevitably find one, but a theory that fits a data cluster is not persuasive evidence. The found explanation needs to make sense, and it needs to be tested with uncontaminated data.

gasmithSimilarly, someone who fires enough bullets at enough targets is bound to hit​ one. A researcher who tests hundreds of theories is bound to find evidence supporting at least one. Such evidence is unconvincing unless the theory is sensible and confirmed with fresh data.

When you hear that the data support a theory, don’t be persuaded until you’ve answered two questions. First, does the theory make sense? If it doesn’t, don’t be easily persuaded that nonsense is sensible. Second, is there​ a Texas sharpshooter​ in the house? Did the person promoting the theory look at the data before coming up with​ the theory​? Were hundreds of theories tested before settling on the theory being promoted? If there is a smoking gun, withhold judgment on the theory until it has been tested with different data.

Empirical economics and statistical power

13 December, 2017 at 21:44 | Posted in Statistics & Econometrics | Leave a comment

decmatHow credible is empirical economics? Is empirical economics adequately powered? Many suspect that statistical power is routinely low in empirical economics. However, to date, there has been no large-scale survey of statistical power widely across empirical economics. The main objectives of this article are to fill this gap, investigate the implications of low power on the magnitude of likely bias and recommend changes in practice that are likely to increase power, reduce bias and thereby increase the credibility of empirical economics …

We are not suggesting that power analysis is never done in economics … Nevertheless, in spite of its widely recognised importance, there are currently no large-scale surveys of statistical power in empirical economics nor a careful quantification of the consequences of ignoring power.

John Ioannidis et al

Economic history — a victim of economics imperialism

13 December, 2017 at 21:30 | Posted in Economics | Leave a comment

Economic history was one of the first fields to succumb at least partially to so-called economics imperialism, the phenomenon through which the methods and models of economic theory have taken over other social scientific subject fields.  The economic historian’s craft, which probably always tended to err in any case towards retrospective reassurance that things were never as bad as they appeared at the time, was thus at least to some extent overwritten by the economic theorist’s often unflinching faith in the universal applicability of their explanatory models …

ecimpIn its orthodox form at least, economic theory reduces all behaviour to that which is consistent with the solution to a partial differential equation.  Such equations will no longer typically be visible in the resulting model, because to say that they are hardly at the cutting-edge of mathematical sophistication is obviously a rather big understatement.  But the presence of economic agents who act slavishly in this way is likely to be a necessary feature of those models.  They are always either maximising or minimising something, akin to the position of turning points of mathematical functions taking the form y = f(x).  No challenge is permitted to this conception of agency, because it is simply assumed that nature has ordained the economic agent to act in this way.  If they are not either maximising or minimising something, then they cannot be considered to have acted economically at all.

Economic history written through the perspective of this style of orthodox economic theory consequently has all of its behavioural uncertainty removed at the point of origin.  Historical uncertainty may still be admissible, but what of the scope for fleshing out the feelings of alienation that so often follow from being caught in a moment of intense historical uncertainty?  Presumably this has to be severely curtailed if every economic agent at every moment of time is blessed with pure certainty of behaviour.

Matthew Watson

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