The hazards of willfully ignoring uncertainty

29 January, 2017 at 13:16 | Posted in Economics | Comments Off on The hazards of willfully ignoring uncertainty

nate silverWe forget – or willfully ignore – that our models are simplifications of the world …

One of the pervasive risks that we face in the information age … is that even if the amount of knowledge in the world is increasing, the gap between what we know and what we think we know may be widening. This syndrome is often associated with very precise-seeming predictions that are not at all accurate … This is like claiming you are a good shot because your bullets always end up in about the same place — even though they are nowhere near the target …

Financial crises – and most other failures of prediction – stem from this false sense of confidence. Precise forecasts masquerade as accurate ones, and some of us get fooled and double-down our bets.

One of the best examples of this ‘masquerading’ is the following statement by Robert Lucas (Wall Street Journal, September 19, 2007):

uN7GNNaI am skeptical about the argument that the subprime mortgage problem will contaminate the whole mortgage market, that housing construction will come to a halt, and that the economy will slip into a recession. Every step in this chain is questionable and none has been quantified. If we have learned anything from the past 20 years it is that there is a lot of stability built into the real economy.

 

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