Nobel Committee making a colossal fool of itself

10 October, 2017 at 16:34 | Posted in Economics | 6 Comments

In its ‘scientific background’ description on the 2017 ‘Nobel prize’ in economics, The Royal Swedish Academy of Sciences writes (emphasis added):

dumstrut-317x330In order to build useful models, economists make simplifying assumptions. A common and fruitful simplification is to assume that agents are perfectly rational. This simplification has enabled economists to build powerful models to analyze a multitude of different economic issues and markets.

badluckWhat absolute nonsense! Writing this and at the same time give the prize to an economist that has devoted his whole career to show how utterly wrong this modelling strategy is, is truly an amazing case of having bad luck when thinking …

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What is behavioural economics?

10 October, 2017 at 14:39 | Posted in Economics | Comments Off on What is behavioural economics?


Great lecture!

Yours truly especially appreciates Thaler’s excursion into the history of economics, forcefully showing the amazing extent to which mainstream economics suffers from severe amnesia. And trying to save it as e. g. Paul Krugman, arguing that rationality “in some parts of economics … seems to be a bit of a noble lie, useful as a guide for thinking as long as you keep your tongue firmly in your cheek” is, of course, nothing but flimflam. Real science can never be done with tongue in cheek. The economic and financial crises we’ve lived through lately and the fact that mainstream economics, with their models based on instrumental rationality assumptions, has had next to nothing to contribute to understanding or explaining them, ​shows that mainstream economics is a degenerative research program in dire need of replacement. No matter how precise and rigorous the analysis is, and no matter how hard one tries to cast the argument in modern ‘the model is the message’ form, mainstream economists like Krugman do not push economic science forwards one millimetre​ since they simply do not stand the acid test of relevance to the target. No matter how clear, precise, rigorous or certain the inferences delivered inside their narrowly based ‘rationality​’ models are, they do not per se say anything about real-world​ economies.

Richard Thaler gets the 2017 ‘Nobel prize’

9 October, 2017 at 12:39 | Posted in Economics | 1 Comment

150511_tbq_thaler_portraitToday The Royal Swedish Academy of Sciences announced that it  has decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2017 to Richard Thaler.

A good choice for once!

To yours truly Thaler’s main contribution has been to show that one of the main building blocks of modern mainstream economics — expected utility theory — is fundamentally wrong.

If a friend of yours offered you a gamble on the toss of a coin where you could lose €100 or win €200, would you accept it? Probably not. But if you were offered to make one hundred such bets, you would probably be willing to accept it, since most of us see that the aggregated gamble of one hundred 50–50 lose €100/gain €200 bets has an expected return of €5000 (and making our probabilistic calculations we find out that there is only a 0.04% risk of losing any money).

Unfortunately – at least if you want to adhere to the standard neoclassical expected utility maximization theory – you are then considered irrational! A mainstream neoclassical utility maximizer that rejects the single gamble should also reject the aggregate offer.

In Matthew Rabin’s and Richard Thaler’s modern classic Risk Aversion it is forcefully and convincingly shown that expected utility theory does not explain actual behaviour and choices.

What is still surprising, however, is that although the expected utility theory is obviously descriptively inadequate, colleagues and microeconomics textbook writers all over the world gladly continue to use it, as though its deficiencies were unknown or unheard of.

That cannot be the right attitude when facing scientific anomalies. When models are plainly wrong, you’d better replace them! Or as Rabin and Thaler have it:

It is time for economists to recognize that expected utility is an ex-hypothesis, so that we can concentrate our energies on the important task of developing better descriptive models of choice under uncertainty.

What many of the works of Thaler show is that expected utility theory is an ‘ex-hypothesis.’ Or as Monty Python has it:

ex-ParrotThis parrot is no more! He has ceased to be! ‘E’s expired and gone to meet ‘is maker! ‘E’s a stiff! Bereft of life, ‘e rests in peace! If you hadn’t nailed ‘im to the perch ‘e’d be pushing up the daisies! ‘Is metabolic processes are now ‘istory! ‘E’s off the twig! ‘E’s kicked the bucket, ‘e’s shuffled off ‘is mortal coil, run down the curtain and joined the bleedin’ choir invisible!! THIS IS AN EX-PARROT!!

An ex-parrot that transmogrifies truth shouldn’t just be marginally mended. It should be replaced!

Nonsensforskning

9 October, 2017 at 08:57 | Posted in Education & School | 1 Comment

I Filosofiska rummet diskuterade Mats Alvesson, Ebba Lisberg Jensen och Tapio Salonen förra veckan kvaliteten på samhällsvetenskaplig forskning.

alvMycket av dagens samhällsforskning är meningslöst nonsens. Anledningarna till detta är så klart många, men en viktig faktor är att det inom akademin nuförtiden är så viktigt att producera mycket snarare än bra och betydelsefull forskning. En riktigt bra bok eller artikel väger lätt mot tio mer eller mindre ointressanta och irrelevanta nonsensartiklar publicerade i någon ‘vetenskaplig’ tidskrift när man söker tjänster eller försöker meritera sig. Resutaltet blir att det i bästa fall är en av hundra artiklar som läses av mer än de närmast sörjande och har någon i verklig mening nytt, intressant och betydelsefullt att säga. Resten är nonsens som hör hemma i papperskorgen.

The limited real-world usefulness of economics

8 October, 2017 at 17:46 | Posted in Economics | 2 Comments

Whole Foods is providing the world with a very interesting economics lesson. Immediately after Amazon bought the upscale grocery store chain, it cut prices substantially for many items on the shelves. As a result, sales have boomed by around 25 percent.

Was the price cut a good move? Actually, the real lesson might be how little economics has to say …

modelInterestingly, economics doesn’t shed much light on this issue. In the models students learn in their undergraduate courses, companies don’t make mistakes — they simply act in their own rational interest to maximize profits. Any temporary errors get smoothed out in the long run, as bad managers and inefficient companies are weeded out of the market.

But this is more of a hopeful assumption than a hard scientific fact. A quick glance at the simplest economic model shows how unrealistic it is to expect industries and markets to adjust smoothly and perfectly …

So introductory economics, with its blithe optimistic long-run focus, has little to teach future corporate managers. Advanced economics has more complicated math, but also tends to assume that corporate decisions are all optimal …

So why is economics such a perennially popular major for the up-and-coming white-collar business class? It gives kids a general faith in free markets and a bit of practice using math to solve problems. It teaches them how to think about government policy like minimum wages or fiscal stimulus. But it doesn’t actually teach much about the real workings of business …

So while the economics major is now riding high, this is subject to change. If the aspiring business class gets tired of being told that markets will work out just fine, and starts wanting to learn how to actually make markets work, there could eventually be an exodus into more business-themed majors.

So perhaps the lesson of Amazon and Whole Foods is about the limited real-world usefulness of economics itself.

Noah Smith

What Noah says here only confirms what I have been arguing for years now – mainstream neoclassical economics is in the story-telling business.

Mainstream neoclassical economics has since long given up on the real world and contents itself with proving things about thought up worlds. Empirical evidence only plays a minor role in economic theory, where models largely function as a substitute for empirical evidence. The manifest failure of its theoretical pretences, the one-sided, almost religious, insistence on axiomatic-deductivist modelling as the only scientific activity worthy of pursuing in economics, are all testimonies of its inability to become a science that gives birth to new, interesting, relevant, and informative knowledge.

In the end, it all boils down to the fact that we all know that most activities, relations, processes and events in society are genuinely uncertain. The data do not unequivocally single out one decision as the only ‘rational’ one. Neither the economist, nor the deciding individual, can fully pre-specify how people will decide when facing uncertainties and ambiguities that are ontological facts of the way the world works.

Grenzen der mathematischen Erkenntnis

8 October, 2017 at 13:09 | Posted in Economics | Comments Off on Grenzen der mathematischen Erkenntnis

 

Die verwaltete Welt

8 October, 2017 at 12:08 | Posted in Politics & Society | Comments Off on Die verwaltete Welt

 

Adorno und Horkheimer im Gespräch über die verwaltete Welt und die Krise des Individuums in dieser.

The Morgenbesser retort and revealed preference theory

7 October, 2017 at 16:47 | Posted in Economics | 1 Comment

counter The experiment reported here was designed to reflect the fact that revealed preference theory is concerned with hypothetical choices rather than actual choices over time. In contrast to earlier experimental studies, the possibility that the different choices are made under different preference patterns can almost be ruled out. We find a considerable number of violations of the revealed preference axioms, which contradicts the neoclassical theory of the consumer maximising utility subject to a given budget constraint. We should therefore pay closer attention to the limits of this theory as a description of how people actually behave, i.e. as a positive theory of consumer behaviour. Recognising these limits, we economists should perhaps be a little more modest in our ‘imperialist ambitions’ of explaining non-market behaviour by economic principles.

Reinhard Sippel 

Sippel’s experiment showed considerable violations of the revealed preference axioms and that from a descriptive point of view — as a theory of consumer behaviour — the revealed preference theory was of a very limited value.

The neoclassical theory of consumer behaviour has been developed in great part as an attempt to justify the idea of a downward-sloping demand curve. What forerunners like e.g. Cournot (1838) and Cassel (1899) did was merely to assert this law of demand. The utility theorists tried to deduce it from axioms and postulates on individuals’ economic behaviour. Revealed preference theory — in the hands of Paul Samuelson and Hendrik Houthakker — tried to build a new theory and to put it in operational terms but ended up with just giving a theory logically equivalent to the old one. As such it also shares its shortcomings of being based on unrestricted universal statements.

an Lack of precise definition should not … disturb us in moral sciences, but improper concepts constructed by attributing to man faculties which he actually does not possess, should. And utility is such an improper concept … [P]erhaps, because of this impasse … some economists consider the approach offered by the theory of choice as a great progress … This is simply an illusion ​because even though the postulates of the theory of choice do not use the terms ‘utility’ or ‘satisfaction’, their discussion and acceptance require that they should be translated into the other vocabulary … A good illustration of the above point is offered by the ingenious theory of the consumer constructed by Samuelson.

Demanding consistency in a theory that builds on an ad hoc constancy assumption of human behaviour doesn’t take us very far in understanding real-world human behaviour. Not taking account of institutional and cognitive factors constantly changing our behaviour is simply bad science.

One could, of course, choose to simply treat revealed preference theory as a purely deducible syntactic scientific theory consisting of a set of uninterpreted sentences. If so, the theory is arguably ‘true’ — but, of course, from an economic point of view, also totally empty and uninteresting!  A social science theory that does not make claims about the world we live in is nothing but irrelevant pseudo-science. Arguing that revealed preference theory is nothing but a set of definitions, defining what is considered to be rational, is empty axiomatics without any connection to the real world, and therefore — besides its possible heuristic values — totally uninteresting for social scientists. Definitions and axioms are not up to empirical testing, simply because you cannot test empirical claims that have not been made.

But most social scientists find this approach to exclude the complexities of reality unacceptable. A ‘conventionalist’ approach — reducing all theoretical hypotheses to a set of axioms or ‘postulates’  — may ‘save’ a theory, but only at the price of giving up the search for truth or, even, the possibility of asserting anything about the real world. Among economists, revealed preference theory has always been more than a set of definitions and axioms. It’s a theoretical hypothesis asserting things about (parts of) the real-world system we live in.

What Sippel managed to do was to show that as such a hypothesis, revealed preference theory was no good. Its basic assumptions were shown not only to be unjustified, but actually false. His experiment was a decisive counterexample showing that the universal claims for revealed preference theory are false.

And how do mainstream economists react when confronted with this monumental absence of empirical fit of revealed preference theory? Well, they do as they always have done – they use one of their four pet strategies for immunizing their models and theories to the facts:

♦ Treat the model as an axiomatic system, making all its claims into tautologies – “true” by the meaning of propositional connectives.

♦ Use unspecified auxiliary ceteris paribus assumptions, giving all claims put forward in the model unlimited ‘alibis.’

♦ Limit the application of the model to restricted areas where the assumptions/hypotheses/axioms are met.

♦ Leave the application of the model open, making it impossible to falsify/refute the model by facts.

Sounds great, doesn’t it? Well, the problem is, of course, that ‘saving’ theories and models by these kinds of immunizing ‘conventionalist tricks’ or strategies are totally unacceptable from a scientific point of view. Equivocation between interpreting models as empirically empty and purely deductive-axiomatic analytical systems, or, respectively, as models with explicit empirical aspirations is unwarranted and highly questionable. Models and theories that are compatible with everything, or come with unspecified domains of application, are worthless from a scientific point of view.

But, of course, no discussion of counterexamples is complete without a mention of Morgenbesser’s retort. So here it is:

morgenbesser

John Nash on unsound game theory

7 October, 2017 at 10:18 | Posted in Economics | 3 Comments

 

What John Nash (!) says underlines the very fundamental methodological weakness of game theory and neoclassical mainstream economics at large. Overemphasizing​ the reach of instrumental rationality and abstracting​ away from the influence of non-economic factors, reduces the analysis to a pure thought experiment without any substantial connection to reality​. Limiting theoretical economic analysis in this way — not incorporating both motivational and institutional factors when trying to explain human behaviour​ — makes economics insensitive to social​ facts, and thus useless.

Economic relations are always embedded in socio-cultural contexts​. Not taking account of that, economics will never be able to come up with useful and relevant explanations. ​

The law of demand — nothing but a useless tautology

6 October, 2017 at 22:06 | Posted in Economics | Comments Off on The law of demand — nothing but a useless tautology

Mainstream economics is usually considered to be very ‘rigorous’ and ‘precise.’ And yes, indeed, it’s certainly full of ‘rigorous’ and ‘precise’ statements like “the state of the economy will remain the same as long as it doesn’t change.” Although ‘true,’ this is, however — as most other analytical statements — neither particularly interesting nor informative.

As is well known, the law of demand is usually tagged with a clause that entails numerous interpretation problems: the ceteris paribus clause. In the strict sense this must thus at least be formulated as follows to be acceptable to the majority of theoreticians: ceteris paribus – that is, all things being equal – the demanded quantity of a consumer good is a monotone-decreasing function of its price …

lawdemIf the factors that are to be left constant remain undetermined, as not so rarely happens, then the law of demand under question is fully immunized to facts, because every case which initially appears contrary must, in the final analysis, be shown to be compatible with this law. The clause here produces something of an absolute alibi, since, for every apparently deviating behavior, some altered factors can be made responsible. This makes the statement untestable, and its informational content decreases to zero.

One might think that it is in any case possible to avert this situation by specifying the factors that are relevant for the clause. However, this is not the case. In an appropriate interpretation of the clause, the law of demand that comes about will become, for example, an analytic proposition, which is, in fact, ​true for logical reasons, but which is thus precisely for this reason not informative. This, of course, ​applies to any interpretation that makes the then-clause of the law of demand under question a logical consequence of its if-clause so that, in this case, an actual logical implication results … Through an explicit interpretation of the ceteris paribus clause, the law of demand is made into a tautology.

24958274Various widespread formulations of the law of demand contain an interpretation of the clause that does not result in a tautology, but that has another weakness. The list of the factors to be held constant includes, among other things, the structure of the needs of the purchasing group in question. This leads to a difficulty connected with the identification of needs. As long as there is no independent test for the constancy of the structures of needs, any law that is formulated in this way has an absolute ‘alibi’. Any apparent counter case can be traced back to a change in the needs, and thus be discounted. Thus, in this form, the law is also immunized against empirical facts. To counter this situation, it is in fact necessary to dig deeper into the problem of needs and preferences; in many cases, however, this is held to be unacceptable, because it would entail crossing the boundaries into social psychology.

Hans Albert

In mainstream economics there’s — still — a lot of talk about ‘economic laws.’ The crux of these laws — and regularities — that allegedly do exist in economics, is that they only hold ceteris paribus. That fundamentally means that these laws/regularites only hold when the right conditions are at hand for giving rise to them. Unfortunately, from an empirical point of view, those conditions are only at hand in artificially closed nomological models purposely designed to give rise to the kind of regular associations that economists want to explain. But, really, since these laws/regularities do not exist outside these ‘socio-economic machines,’ what’s the point in constructing thought experimental models showing these non-existent laws/regularities? When the almost endless list of narrow and specific assumptions necessary to allow the ‘rigorous’ deductions are known to be at odds with reality, what good do these models do?

Deducing laws in theoretical models is of no avail if you cannot show that the models — and the assumptions they build on — are realistic representations of what goes on in real-life.

Conclusion? Instead of restricting our methodological endeavours at building ever more rigorous and precise deducible models, we ought to spend much more time improving our methods for choosing models!

Formalistic deductive “Glasperlenspiel” can be very impressive and seductive. But in the realm of science, ​it ought to be considered of little or no value to simply make claims about the model and lose sight of reality.

errThere is a difference between having evidence for some hypothesis and having evidence for the hypothesis relevant for a given purpose. The difference is important because scientific methods tend to be good at addressing hypotheses of a certain kind and not others: scientific methods come with particular applications built into them … The advantage of mathematical modelling is that its method of deriving a result is that of mathematical​ proof​: the conclusion is guaranteed to hold given the assumptions. However, the evidence generated in this way is valid only in abstract model worlds while we would like to evaluate hypotheses about what happens in economies in the real world … The upshot is that valid evidence does not seem to be enough. What we also need is to evaluate the relevance of the evidence in the context of a given purpose.

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