Tractability, truth, and ignorability

25 Aug, 2018 at 15:37 | Posted in Statistics & Econometrics | 1 Comment

Most attempts at causal inference in observational studies are based on assumptions that treatment assignment is ignorable. Such assumptions are usually made casually, largely because they justify the use of available statistical methods and not because they are truly believed.

Marshall Joffe et al.

An interesting (but from a technical point of view rather demanding) article on a highly questionable assumption used in ‘potential outcome’ causal models. It made yours truly come to think of how tractability has come to override reality​ and truth also in moder​n mainstream economics.

Having a ‘tractable’ model is of course great, since it usually means that you can solve it. But — using ‘simplifying’ tractability assumptions (rational expectations, common knowledge, representative agents, linearity, additivity, ergodicity, etc.) because otherwise they cannot ‘manipulate’ their models or come up with ‘rigorous ‘ and ‘precise’ predictions and explanations, does not exempt economists from having to justify their modelling choices. Being able to ‘manipulate’ things in models cannot per se be enough to warrant a methodological choice. If economists do not think their tractability assumptions make for good and realist models, it is certainly a just question to ask for clarification of the ultimate goal of the whole modelling endeavour.

Take for example the ongoing discussion on rational expectations as a modelling assumption. Those who want to build macroeconomics on microfoundations usually maintain that the only robust policies are those based on rational expectations and representative actors models. As yours truly has tried to show in On the use and misuse of theories and models in mainstream economics there is really no support for this conviction at all. If microfounded macroeconomics has nothing to say about the real world and the economic problems out there, why should we care about it? The final court of appeal for macroeconomic models is not if we — once we have made our tractability assumptions — can ‘manipulate’ them, but the real world. And as long as no convincing justification is put forward for how the inferential bridging de facto is made, macroeconomic modelbuilding is little more than hand-waving that give us rather a little warrant for making inductive inferences from models to real-world target systems. If substantive questions about the real world are being posed, it is the formalistic-mathematical representations utilized to analyze them that have to match reality, not the other way around.

1 Comment

  1. Actual problems of the actual economy are, it seems to me in many instances and in some important degree, intractable. That theorists find it necessary to resort to “heroic” assumptions of rational expectations or ergodicity in abstractly re-framing such problems in order to calculate a definite solution ought to indicate an important truth to us about uncertainty in the real world: that there is no definite, optimal solution space available to economic actors in the real world. That may be a disappointing realization to Dr. Pangloss, but surely it is the truth: as economic actors, individually and collectively, we only muddle through, acting arbitrarily in the face of uncertainty, not knowing the consequences and only imperfectly and incompletely learning what we need to know to judge wisely after the fact, after many, many facts.
    I find I am not in sympathy with Professor Syll’s rhetoric of “inferential bridging” “from models to real-world target systems” as a matter of epistemology. I do not think theoretical analysis, per se, ever “bridges” to reality. Analytical models help in working out conceptual logic, which is far from nothing, but the study of reality requires (to use Popper’s term as a matter of convenience only) operational models and measurement. Economics goes wrong in the first instance, when the teacher, having chalked some equations on the blackboard laying out his theory, waves his hand out the window, saying casually, the “world is like this analytical model” as if actually studying reality was some trivial pursuit.
    “Rational expectations”, it seems to me, could be considered equivalent to assuming that the institutions that serve to force the disclosure of private information and form consensus-reality work perfectly and to an extreme: the market price of a financial security, for example, is informationally efficient to such a degree that every actor acts as if the price was objectively true and defers to such objective truth in preference to whatever idiosyncratic, subjective, private assessment a distinct individual might harbor. Thus, all individuals act uniformly like a representative actor.
    We could quibble about whether such a theoretical research program has gone astray onto the path of a degeneracy, but the unforgivable sin is the unfounded assertion that “the world is like this” stunted analytic model. I say there can be no “bridge”. So, I do not look for a better rationalization of the unfounded and impossible assertion that the world can ever be “like” an inherently a priori analytic model.
    What we can do, and economists rarely do before pontificating (usually on behalf of plutocrats, but that’s another problem), is study the actual institutions of our economy and the quantitative degree to which they function effectively and by what means of design. In an actual market for financial securities, for example, there will be a tension between the use of private information and the reliability of public information and whatever informational efficiency is achieved will be a matter of variable degree; volatility may be as much a means of fleecing the rubes as adapting to an emergent reality and rational expectations will importantly be disappointed expectations.
    Studying reality is not about impossible “bridges” to analysis, but about actually doing the work of synthesis, of objective measurement to establish actual, non-stylized facts.

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