Econometric delusions

22 October, 2015 at 16:42 | Posted in Economics, Statistics & Econometrics | 3 Comments

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Because I was there when the economics department of my university got an IBM 360, I was very much caught up in the excitement of combining powerful computers with economic research. Unfortunately, I lost interest in econometrics almost as soon as I understood how it was done. My thinking went through four stages:

1.Holy shit! Do you see what you can do with a computer’s help.
2.Learning computer modeling puts you in a small class where only other members of the caste can truly understand you. This opens up huge avenues for fraud:
3.The main reason to learn stats is to prevent someone else from committing fraud against you.
4.More and more people will gain access to the power of statistical analysis. When that happens, the stratification of importance within the profession should be a matter of who asks the best questions.

Disillusionment began to set in. I began to suspect that all the really interesting economic questions were FAR beyond the ability to reduce them to mathematical formulas. Watching computers being applied to other pursuits than academic economic investigations over time only confirmed those suspicions.

1.Precision manufacture is an obvious application for computing. And for many applications, this worked magnificently. Any design that combined straight line and circles could be easily described for computerized manufacture. Unfortunately, the really interesting design problems can NOT be reduced to formulas. A car’s fender, for example, can not be describe using formulas—it can only be described by specifying an assemblage of multiple points. If math formulas cannot describe something as common and uncomplicated as a car fender, how can it hope to describe human behavior?
2.When people started using computers for animation, it soon became apparent that human motion was almost impossible to model correctly. After a great deal of effort, the animators eventually put tracing balls on real humans and recorded that motion before transferring it to the the animated character. Formulas failed to describe simple human behavior—like a toddler trying to walk.

Lately, I have discovered a Swedish economist who did NOT give up econometrics merely because it sounded so impossible. In fact, he still teaches the stuff. But for the rest of us, he systematically destroys the pretensions of those who think they can describe human behavior with some basic Formulas.

Jonathan Larson

Wonder who that Swedish economist could be …



  1. Yes indeed! I am almost daily astonished at the firepower you bring to the debate about econometrics. And yet you persist.

    Miraculous! Thank you for your dedication and hard work.


  2. The Years of High Econometrics
    A short history of the generation that
    reinvented economics by Francisco Louçã

    “The creation of econometrics was the most important transformation in
    twentieth-century economics and the establishment of the Econometric Society,
    the Cowles Commission and the journal Econometrica were just three of the
    events that would shape its development.

    Taking Ragnar Frisch as the narrator,
    Francisco Louçã presents a comprehensive history of this fascinating innovation.
    Louçã includes all the major players in this history from the economists like
    Wesley Mitchell, Irving Fisher, Joseph Schumpeter and Maynard Keynes to the
    mathematicians like John von Neumann, as well as the statisticians like Karl
    Pearson, Jerzy Neyman and R.A. Fisher.

    He discusses the evolution of their
    thought, detailing the debates, the quarrels and the interrogations that crystallised
    their work. Louçã even offers a conclusion of sorts, suggesting that some
    of the founders of econometrics became critical of its later development.

    This book will be of great interest to students, academics and researchers
    alike in the history of economics, not least because it contains archive material
    that has not been published. It would be a welcome accompaniment to students
    taking courses on statistics and probability, econometric methods, macroeconometrics and the history of economic thought.”

    Francisco Louçã is Professor of Economics at the ISEG in Lisbon. He is also a
    member of Parliament.

    • Thanks Jan. Very interesting book. Highly recommended reading!

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