The stuff of genius

18 October, 2017 at 20:47 | Posted in Education & School | 3 Comments

Several years later I developed a broader theory of what separates the two general classes of learners—helpless versus mastery-oriented. I realized that these different types of students not only explain their failures differently, but they also hold different “theories” of intelligence. The helpless ones believe that intelligence is a fixed trait: you have only a certain amount, and that’s that. I call this a “fixed mind-set.” Mistakes crack their self-confidence because they attribute errors to a lack of ability, which they feel powerless to change. They avoid challenges because challenges make mistakes more likely and looking smart less so … Such children shun effort in the belief that having to work hard means they are dumb.

Your-Inner-GeniusThe mastery-oriented children, on the other hand, think intelligence is malleable and can be developed through education and hard work. They want to learn above all else. After all, if you believe that you can expand your intellectual skills, you want to do just that …

We validated these expectations in a study published in early 2007 … As we had predicted, the students with a growth mind-set felt that learning was a more important goal in school than getting good grades. In addition, they held hard work in high regard, believing that the more you labored at something, the better you would become at it. They understood that even geniuses have to work hard for their great accomplishments. Confronted by a setback such as a disappointing test grade, students with a growth mind-set said they would study harder or try a different strategy for mastering the material.

The students who held a fixed mind-set, however, were concerned about looking smart with less regard for learning. They had negative views of effort, believing that having to work hard at something was a sign of low ability …

EinstinePeople may well differ in intelligence, talent and ability. And yet research is converging on the conclusion that great accomplishment, and even what we call genius, is typically the result of years of passion and dedication and not something that flows naturally from a gift. Mozart, Edison, Curie, Darwin and Cézanne were not simply born with talent; they cultivated it through tremendous and sustained effort. Similarly, hard work and discipline contribute more to school achievement than IQ does.

Carol S. Dweck

Being diagnosed a ‘gifted child’ sure is a confidence boost. But it’s not always the blessing people so often assume. It can also blind you to the fact that even if you’re smart, there are other people who are also smart. People you can learn from and that makes brain neurons grow new connections. For some of us that insight — unfortunately — comes late in life.

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John von Neumann

18 October, 2017 at 19:03 | Posted in Varia | Leave a comment

 

Joan Robinson and the inadequacies of revealed preference theory

17 October, 2017 at 19:13 | Posted in Economics | 6 Comments

We are told nowadays that since utility cannot be measured it is not an operational concept, and that ‘revealed preference’ should be put in its place. Observable market behaviour will show what an individual chooses …

joanIt is just not true that market behaviour can reveal preferences. It is not only that the experiment of offering an individual alternative bundles of goods, or changing his income just to see what he will buy, could never be carried out in practice. The objection is logical, not only practical …

We can observe the reaction of an individual to two different sets of prices only at two different times. How can we tell what part of the difference in his purchases is due to the difference in prices and what part to the change in his preferences that has taken place meanwhile? There is certainly no presumption that his character has not changed, for soap and whisky are not the only goods whose use affects tastes. Practically everything develops either an inertia of habit or a desire for change.

We have got one equation for two unknowns. Unless we can get some independent evidence about preferences the experiment is no good. But it was the experiment that we were supposed to rely on to observe the preferences.

As so often, Robinson hits the nail on the head.

The very raison d’être for developing revealed preference theory in the 1930’s and 1940’s was to be able to ascertain people’s preferences by observation of their actual behaviour on markets and not having to make unobservable psychological assumptions or rely on any utility concepts. This turned out to be impossible. Samuelson et consortes had to assume unchanging preferences, which, of course, was in blatant contradiction to the attempt of building a consumer and demand theory without non-observational concepts.

But still, ​a lot of mainstream economists consider the approach offered by revealed preference theory a great progress. As people like Robinson, Georgescu-Roegen, and Kornai have shown, this is, however, nothing but an illusion. Revealed preference theory does not live up to what it claims to offer. As part of the economist’s​ tool-kit, ​it is of extremely limited use.

If we want to be able to explain the behaviour and choices people make, we have to know​ something about people’s beliefs, preferences, uncertainties​, and understandings. Revealed preference​ theory does not provide us with any support whatsoever in accomplishing that.

Paul Romer on Richard Thaler

17 October, 2017 at 15:53 | Posted in Economics | Leave a comment

cheryl-chow-quote-im-not-a-showhorse-im-a-workhorseI understand the purely aesthetic appeal of a convincing scientific explanation … The problem is that people can derive aesthetic pleasure from many different types of “explanation.” After all, the problem with the traditional choice model based on conscious utility maximization is not that it is ugly. And, on grounds of mathematical beauty, no economic model can touch a theory of perfect competition grounded in convex duality. The real problem is that these models are show horses, not work horses.

As far as I can tell, the only way to decide when and how to add some messy detail to a scientific explanation is also the way to distinguish the work of scientists from our work of scientologists and their ilk. Scientists are the ones who remain committed to useful knowledge as the only final output that matters …

To be sure, we have to leave room for early work on knowledge that looks to be potentially useful. But ultimately, scientific knowledge has to do real work. This why Dick’s contributions are so important.

Paul Romer

Microeconomic aggregation problems

16 October, 2017 at 14:59 | Posted in Economics | 3 Comments

If a demand function for the economy as a whole is to be estimated, just drawing upon the economy’s overall income and the price system, is it legitimate to use the demand system derived for an individual? In other words, can we estimate demand functions independently of the distribution of income and preferences across consumers?

fineNot surprisingly, the answer is no in general, and the conditions for it to be yes are extremely stringent, indeed unrealistically so. Essentially, the economy as a whole needs to consume as it were a single individual with a given income. But if we take income from one consumer and give it to another, the pattern of demand will be different unless those two consumers have the same preferences. So we have to assume that each and every consumer has the same preferences. However, even this assumption is not enough​. Suppose it is true, and take income from a rich person and give it to a poor person. Their patterns of consumption around their initial levels of income are liable to be very different, luxuries as opposed to necessities. So, redistributing the income from rich to poor will not leave demand unchanged but shift it from luxuries to necessities. To have an aggregate demand function as if the economy were a single individual it is necessary both that every individual has the same preferences and that those preferences remain in the same proportions at every level of income (or, to put it another way, once you know one indifference curve for our representative individual, you know them all, not only for that consumer, but for all others as well — all consumers must have the same, so-called homothetic indifference curves). To be sure that the aggregation problem to be negotiated, it is necessary that the economy’s demand be reduced to a single indifference curve … Significantly, the insurmountable nature of the aggregation problem is well established within the orthodoxy, as a result of what is known as the​ Sonnenschein-Mantel-Debreu theorem …

Obviously, this is entirely unacceptable …

Indeed, this is, from a scientific point of view, “entirely unacceptable.”

But so what? Why should we care about mainstream economists making assumptions that are totally unwarranted and unjustifiable? Why should we care that people make outrageous assumptions based solely on mathematical tractability and convenience? Why should we care about Sonnenschein-Mantel-Debreu?

Because those assumptions in general — and the assumptions behind Sonnenschein-Mantel-Debreu in particular — ultimately explains why New Classical, Real Business Cycles, Dynamic Stochastic General Equilibrium (DSGE) and ‘New Keynesian’ microfounded macromodels are such bad substitutes for real macroeconomic analysis!

These models try to describe and analyze complex and heterogeneous real economies with a single rational-expectations-robot-imitation-representative-agent. That is, with something that has absolutely nothing to do with reality. And — worse still — something that is not even amenable to the kind of general equilibrium analysis that they are thought to give a foundation for, since Hugo Sonnenschein (1972) , Rolf Mantel (1976) and Gerard Debreu (1974) unequivocally showed that there did not exist any sustainable condition by which assumptions on individuals would guarantee either stability or uniqueness of the equlibrium solution.

Opting for cloned representative agents that are all identical is of course not a real solution to the aggregation problem that the Sonnenschein-Mantel-Debreu theorem points to. Representative agent models are — as I have argued at length here — rather an evasion whereby issues of distribution, coordination, heterogeneity — everything that really defines macroeconomics — are swept under the rug.

Of course, most macroeconomists know that to use a representative agent is a flagrantly illegitimate method of ignoring real aggregation issues. They keep on with their business, nevertheless, just because it significantly simplifies what they are doing. It reminds — not so little — of the drunkard who has lost his keys in some dark place and deliberately chooses to look for them under a neighbouring street light just because it is easier to see there …

Mainstream microeconomics is full of blatant inadequacies. Trying to ‘save’ it by assuming fantasy things like representative agents and homothetic indifference curves, is a sure sign of a deductive-axiomatic research programme gone terribly wrong.

How to get published in top economics journals

16 October, 2017 at 14:05 | Posted in Economics | 2 Comments

Halmos2If you think that your paper is vacuous,

Use the first-order functional calculus.

It then becomes logic,

And, as if by magic,

The obvious is hailed as miraculous.

Paul Halmos

 

Putting theories to the test

13 October, 2017 at 16:10 | Posted in Economics | 5 Comments

Mainstream neoclassical economists often maintain — usually referring to the methodological individualism of Milton Friedman — that it doesn’t matter if the assumptions of the theories and models they use are realistic or not. What matters is if the predictions are right or not. But, if so, then the only conclusion we can make is — throw away the garbage! Because, oh dear, oh dear, how wrong they have been!

The empirical and theoretical evidence is clear. Predictions and forecasts are inherently difficult to make in a socio-economic domain where genuine uncertainty and unknown unknowns often rule the roost. The real processes that underly the time series that economists use to make their predictions and forecasts do not conform with the assumptions made in the applied statistical and econometric models. Much less is a fortiori predictable than standardly — and uncritically — assumed. The forecasting models fail to a large extent because the kind of uncertainty that faces humans and societies actually makes the models strictly seen inapplicable. The future is inherently unknowable — and using statistics, econometrics, decision theory or game theory, does not in the least overcome this ontological fact. The economic future is not something that we normally can predict in advance. Better then to accept that as a rule “we simply do not know.”

papIt is of paramount importance that economists be frank with themselves and their audience. The limitations of current practice … must be recognized openly. If we are engaged in ex post facto explanation, we should be quite ready to say so, rather than pretend that our ‘theories’ can pass the same tests that theories of well-developed sciences can pass … Recognition of the character of current methodological practice will go a long way toward substituting fact for myth and thus open the way to new horizons of research.

Axioms — things to be suspicious of

13 October, 2017 at 09:51 | Posted in Economics | 1 Comment

miracle_cartoon To me, the crucial difference between modelling in physics and in economics lies in how the fields treat the relative role of concepts, equations and empirical data …

An economist once told me, to my bewilderment: “These concepts are so strong that they supersede any empirical observation” …

Physicists, on the other hand, have learned to be suspicious of axioms. If empirical observation is incompatible with a model, the model must be trashed or amended, even if it is conceptually beautiful or mathematically convenient.

Jean-Philippe Bouchaud

Thaler and behavioural economics — some critical perspectives

12 October, 2017 at 12:06 | Posted in Economics | 2 Comments

Although discounting empirical evidence cannot be the right way to solve economic issues, there are still, in my opinion, a couple of weighty reasons why we perhaps shouldn’t be too excited about the so-called ’empirical revolution’ in economics.

behBehavioural experiments and laboratory research face the same basic problem as theoretical models — they are built on often rather artificial conditions and have difficulties with the ‘trade-off’ between internal and external validity. The more artificial conditions, the more internal validity, but also less external validity. The more we rig experiments to avoid the ‘confounding factors’, the less the conditions are reminiscent of the real ‘target system.’ The nodal issue is how economists using different isolation strategies in different ‘nomological machines’ attempt to learn about causal relationships. One may have justified doubts on the generalizability of this research strategy since the probability is high that causal mechanisms are different in different contexts and that lack of homogeneity and invariance doesn’t give us warranted export licenses to the ‘real’ societies or economies.

If we see experiments or laboratory research as theory tests or models that ultimately aspire to say something about the real ‘target system,’ then the problem of external validity is central (and was for a long time also a key reason why behavioural economists had trouble getting their research results published).

A standard procedure in behavioural economics — think of e.g. dictator or ultimatum games — is to set up a situation where one induce people to act according to the standard microeconomic — homo oeconomicus — benchmark model. In most cases, the results show that people do not behave as one would have predicted from the benchmark model, in spite of the setup almost invariably being ‘loaded’ for that purpose. [And in those cases where the result is consistent with the benchmark model, one, of course, have to remember that this in no way proves the benchmark model to be right or ‘true,’ since there, as a rule, may be many outcomes that are consistent with that model.]

For most heterodox economists this is just one more reason for giving up on the standard model. But not so for mainstreamers and many behaviouralists. To them, the empirical results are not reasons for giving up on their preferred hardcore axioms. So they set out to ‘save’ or ‘repair’ their model and try to ‘integrate’ the empirical results into mainstream economics. Instead of accepting that the homo oeconomicus model has zero explanatory real-world value, one puts lipstick on the pig and hope to go on with business as usual. Why we should keep on using that model as a benchmark when everyone knows it is false is something we are never told. Instead of using behavioural economics and its results as building blocks for a progressive alternative research program, the ‘save and repair’ strategy immunizes a hopelessly false and irrelevant model.

By this, I do not mean to say that empirical methods per se are so problematic that they can never be used. On the contrary, I am basically — though not without reservations — in favour of the increased use of behavioural experiments and laboratory research within economics. Not least as an alternative to completely barren ‘bridge-less’ axiomatic-deductive theory models. My criticism is more about aspiration levels and what we believe that we can achieve with our mediational epistemological tools and methods in the social sciences.

The increasing use of natural and quasi-natural experiments in economics during the last couple of decades has led several prominent economists to triumphantly declare it as a major step on a recent path toward empirics, where instead of being a deductive philosophy, economics is now increasingly becoming an inductive science.

Limiting model assumptions in economic science always have to be closely examined since if we are going to be able to show that the mechanisms or causes that we isolate and handle in our models are stable in the sense that they do not change when we ‘export’ them to our ‘target systems,’ we have to be able to show that they do not only hold under ceteris paribus conditions and a fortiori only are of limited value to our understanding, explanations or predictions of real economic systems.

‘Ideally controlled experiments’ tell us with certainty what causes what effects — but only given the right ‘closures.’ Making appropriate extrapolations from (ideal, accidental, natural or quasi) experiments to different settings, populations or target systems, is not easy. ‘It works there’ is no evidence for ‘it will work here.’ Causes deduced in an experimental setting still have to show that they come with an export-warrant to the target system. The causal background assumptions made have to be justified, and without licenses to export, the value of ‘rigorous’ and ‘precise’ methods is despairingly small.

Taking assumptions like utility maximization or market equilibrium as a matter of course leads to the ‘standing presumption in economics that, if an empirical statement is deduced from standard assumptions then that statement is reliable’ …

maxresdefaultThe ongoing importance of these assumptions is especially evident in those areas of economic research, where empirical results are challenging standard views on economic behaviour like experimental economics or behavioural finance … From the perspective of Model-Platonism, these research-areas are still framed by the ‘superior insights’ associated with early 20th century concepts, essentially because almost all of their results are framed in terms of rational individuals, who engage in optimizing behaviour and, thereby, attain equilibrium. For instance, the attitude to explain cooperation or fair behaviour in experiments by assuming an ‘inequality aversion’ integrated into​ (a fraction of) the subjects’ preferences is strictly in accordance with the assumption of rational individuals, a feature which the authors are keen to report …

While the mere emergence of research areas like experimental economics is sometimes deemed a clear sign for the advent of a new era … a closer look at these fields allows us to illustrate the enduring relevance of the Model-Platonism-topos and, thereby, shows the pervasion of these fields with a traditional neoclassical style of thought.

Jakob Kapeller

So — although it is good that people like Kahneman and Thaler are rewarded ‘Nobel prizes’ and that much of their research has vastly undermined the lure of axiomatic-deductive mainstream economics, there is still a long way to go before economics has become a truly empirical science.

Added 14:15 GMT: David Ruccio has a post up now on the Real-World Economics Blog that basically argues (I think) in the same spirit as yours truly here.

Keynes — the first behavioural economist

11 October, 2017 at 14:34 | Posted in Economics | 2 Comments

To-day, in many parts of the world, it is the serious embarrassment of the banks which is the cause of our gravest concern …

[The banks] stand between the real borrower and the real lender. They have given their guarantee to the real lender; and this guarantee is only good if the money value of the asset belonging to the real borrower is worth the money which has been advanced on it.

It is for this reason that a decline in money values so severe as that which we are now experiencing threatens the solidity of the whole financial structure. Banks and bankers are by nature blind. They have not seen what was coming. Some of them … employ so-called “economists” who tell us even to-day that our troubles are due to the fact that the prices of some commodities and some services have not yet fallen enough, regardless of what should be the obvious fact that their cure, if it could be realised, would be a menace to the solvency of their institution. A “sound” banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.

But to-day they are beginning at last to take notice. In many countries bankers are becoming unpleasantly aware of the fact that, when their customers’ margins have run off, they are themselves “on margin” …

The present signs suggest that the bankers of the world are bent on suicide. At every stage they have been unwilling to adopt a sufficiently drastic remedy. And by now matters have been allowed to go so far that it has become extraordinarily difficult to find any way out.

It is necessarily part of the business of a banker to maintain appearances and to profess a conventional respectability which is more than human. Lifelong practices of this kind make them the most romantic and the least realistic of men. It is so much their stock-in-trade that their position should not be questioned, that they do not even question it themselves until it is too late. Like the honest citizens they are, they feel a proper indignation at the perils of the wicked world in which they live,—when the perils mature; but they do not foresee them. A Bankers’ Conspiracy! The idea is absurd! I only wish there were one! So, if they are saved, it will be, I expect, in their own despite.

John Maynard Keynes, Essays in Persuasion, 1931

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