Ecology and Economics

Economics: Tendencies Toward 'Cargo Cult' Science

In a recently updated exposé titled Why Economics is on the Wrong Track ('book form' here [PDF], 32 pp., 2002 or find it and other McCloskey' books here) Deirdre McCloskey explicitly notes two "secret sins", argued as peculiar to economic (well, almost). These sins, which we will get to shortly, are bad enough to fill this post. But there is another sin worthy of mention. While not labeling it a sin "peculiar to economics" McCloskey notes that the economics profession, like too many others, while being both "institutionally ignorant" and "historically ignorant" is quietly dismissing its "history of economics" professors:

… Outsiders would likewise be amazed at the Historical Ignorance of the economist. They think that the scientific evidence about economies before the past few years would surely figure in an economist's data. It doesn't. One graduate program after another in the 1970s and 1980s cut the requirement that students become familiar with the economic past. I myself managed for twelve years to fend off the day of execution at the University of Chicago (now do you see the pattern?). The very month I left the department in disgust the barbarians inside the gates sent the economic history requirement to the guillotine, and since then Ph.D.s in economics from the University of Chicago have joined those at Minnesota, Princeton, and Columbia in ignorance of the economic past. At the same time almost all American graduate programs (my own fair Harvard was proudly among the first to do so) were abandoning the study of the past of economics itself. People call themselves economists who have never read a page of Adam Smith or Karl Marx or John Maynard Keynes. It would be like being an anthropologist who had never heard of Malinowski or an evolutionary biologist who had never heard of Darwin.

See also Tsvi Tisk's Utopianism Come of Age: From Post-Modernism to Neo-Modernism:

… I am absolutely dismayed at the ignorance so many professionals have of their own professions: economists and businessmen who do not know economic history or the history of economic ideas; engineers who do not know the history of technology; doctors who do not know the history of medicine or medical paradigms; teachers who do not know the history of education or educational ideas; politicians who do not know the history of politics or political ideas; scientists who do not know the history of science and scientific paradigms etc.

This lack of historical perspective and ability to critically analyze ones own professional self, in the context of ones own historical period, often results in an astounding hubris.

Note that McCloskey serves up a few more "sins" not solely attributable to economics and economists that you need to ferret out from Why Economics is on the Wrong Track. Let's look at the "sins" peculiar to econoimcs.

Two Sins Peculiar to Economics

• "qualitative theorems"
• "statistical significance"

For McCloskey, and me, the first sin is that qualitative economic theorems too often seem to have a life of their own, divorced from the contextual realities of the world. The second sin is that "statistical significance" is used as a shield to convince the gullible that "qualitative theorems" and the data that flesh them out are indeed important. Moreover, many economics practitioners aren't even aware that the 'shield' is in play, believing instead that they are being 'scientific' in ther writeups.

More below, but first, let's introduce the fourth sin via Michael Emmett Brady, in a comment from Truck and Barter on a post titled McCloskey is Oh So Wrong About Statistical Significance:

McCloskey and Ziliak [Measurement and Meaning in Economics: The Essential Deirdre McCloskey ] are correct, but they have overlooked a much more serious problem for econometricians and econometrics. Benoit Mandelbrot has spent over 50 years demonstrating that the normal distribution is not an accurate or reliable representation, in general, for most time series economic data. It is interesting that neither Frisch, Tinbergen, Koopmans, Haavelmo, Marshack et al., ever did ANY goodness of fit test on their time series data to see if the normal distribution was a sound representation of the data. Of course, Keynes asked Tinbergen very politely to demonstrate that his data sets were "...HOMOGENEOUS, UNIFORM, AND STABLE.." over time back in 1939.

No econometrician has ever shown that their time series data pass any goodness of fit test. The test Keynes suggested be used in the A Treatise on Probability on pp.420-421 was the Lexis Q test. Let's hope that future econometricians don't provide the "answer" given by Paul Cootner to Mandelbrot in 1964, which was that they were going to continue to assume normality in spite of the fact that the actual data fit the Cauchy distribution [at] best because it would be too hard to apply the Cauchy. -- February 11, 2006 6:40 PM

{edited lightly by Iverson PS. One could do worse than to read through (maybe after I retire?) Brady's "best books" on "how one should study and organize the data and observations that comprise the social sciences."}

Brady's comment is similar, I believe, to Nassim Nichalos Taleb's "ludic fallacy". Taleb's "narrative fallacy" inter-relates with McCloskey's sin "qualitative theorems" which, when embedded in journal articles become a particularly uninteresting (except to the gullible) form of story-telling. We introduced both Taleb's "fallacies" a few weeks ago.

Note: For completeness, I must mention that this terrain has been traversed many times in many ways. Here are two:

'Grand Theory' and 'Methodism' Traps

• C. Wright Mills. 1959. The Sociological Imagination: Mills suggests that too often social scientists fail to deal with things contextually, instead opting for either "Grand Theory" (unanchored to real world observation, truth-testing, etc.) or "Abstracted Empiricism"—others call this "Methodism"— (dogmatic pursuit of narrow-niche endeavors that have more to do with applying data to elegant mathematical models (or even filling up "spreadsheets" or "taxonomic structures") than which testing the fit of method to real-world endeavors.
• Andrew Sayer. 1984. Method in Social Science—A Realist Approach: Sayer devotes the appendix to detailing pitfalls of falling into either naïve "narrative" or naïve "analysis" traps.

McCloskey on "Secret Sins" (from Why Economics is on the Wrong Track)

'Happiness' as Government Policy?

To move our ethics/policy conversation along further, let's cut to the chase and talk about 'happiness'. Here is some background reading (from debatingmatters.com). What caught my attention today, however, was this from Mark Thoma (Economist's View):

Should We be Happy with Research on Happiness?

What does research on happiness tell us?:

Don’t ask the state for happiness, by Helen Johns and Paul Ormerod, Commentary, Financial Times: The idea that government policy should be focused more explicitly on promoting happiness has been gaining support. Proponents of this view argue that happiness indicators, based on surveys that purport to measure how happy people feel, have stagnated over decades. An important reason is that governments have aimed to maximise ... gross national product, rather than a more holistic indicator of welfare based on happiness.

This premise is clearly false. Politicians have always sought to achieve many things that are not designed to increase GNP. The most recent public service agreements on the British Treasury website, for example, spell out government commitments to ... increase participation in the arts...

A decades-long flat happiness trend could be showing that government policies in general fail... But this would be a depressing conclusion. Instead, happiness advocates make a scapegoat out of GNP and argue that economic growth is irrelevant or detrimental to happiness.

The alternative view is that the happiness data over time contain little or no genuine information. ... Indeed, they show no correlation with a whole range of factors that might reasonably be thought to improve well-being, such as a massive increase in leisure time, a tendency to live longer and a decline in gender inequality.

Income inequality is often claimed to be a strong determinant of happiness, and this “fact” used to argue for more progressive taxation. Yet we do not see any change in recorded happiness when inequality goes up or down. ...

Government attempts to increase measured happiness, rather than making life better for us, may well do the opposite: create arbitrary objectives that divert civil service energies from core responsibilities; give many people the message that happiness emanates from national policy rather than our own efforts; and create pressure for government to appear to increase an indicator that has never before shifted systematically in response to any policy or socioeconomic change. These are exactly the mistakes of the target-driven mentality that now pervades the British public sector. ...

More sinisterly, the happiness view of the world has tendencies that are inherently anti-democratic. The expert with his or her clipboard and regressions knows better than ordinary people themselves what makes them happy. So local democratic or individual decisions can be overridden with a clean conscience. ...

Government does not fail because it does not measure happiness; it fails when its energies are misdirected on the basis of poor quality information.

Should these data be used to draw conclusions such as government intervention may not improve well-being and may actually make things worse? John Quiggin at Crooked Timber has written about the data used to make these assessments:

What’s wrong with happiness measurement?, by by John Quiggin, Crooked Timber …

A quick Google search turned up The pursuit of happiness is so problematic by Stephen King. I think my sentiments lie pretty much with King: The pursuit of happiness is indeed problematic! We are not going to get there by attempting to add it up. Better, I think, to work it out as we go about our culture-forming (institutions) and our personal and family and community decision-making, which too can not be reduced to formulae.

Continuing with the theme of "problematic", let me conclude with these quotes on happiness which help us understand the paradoxes embedded in the term. Better to base one's life on kindness methinks, than happiness. Perhaps a rule of thumb might be: kindness through service begets happiness, but kindness/service alone is not enough. There are other things that come into play, like "purpose," "integrity" …

Nassim Taleb on Cultural Blinders

   "It ain't so much the things we don't know that get us into trouble. It's the things we know that just ain't so." Mark Twain

I keep finding gems of wisdom in Nassim Nicholas Taleb's The Black Swan: The Impact of the Highly Improbable. It's not so much that I'm getting Ah Ha! moments on every page, even though there are plenty, but rather that Taleb sums up so many things succiently that I've been gleaning for years from the very books and articles he cites. It's like coming home. I'm not going to review the Taleb's book here/now. If you are not familiar with it you can find several reviews hyperlinked below, or go to Taleb's Home Page for more.

Instead, I simply want to highlight a few interesting The Black Swan tidbits. Maybe that will whet your appetite for more. Let's look at snippets of Taleb's key points about how we are too often blinded in thinking and decision-making by what he calls the "ludic fallacy" (force-fitting chaotic emergent or past "reality" into models) and the "narrative fallacy" (force-fitting the same into storylines). Let's first look at the ludic fallacy. Taleb:

What is the ludic fallacy? Ludic comes from ludis, Latin for games. … In the casino you know the rules, you can calcalute the odds, and the type of uncertainty we encounter there. …

In real life you do not know the odds; you need to discover them, and the sources of uncertainty are not defined. Economists … draw an artifical distinction between Knightian risks (which you can compute), and Knightian uncertainty (which you cannot compute), after … Frank Knight ….

Yet we automatically, spontaneously associate chance with these Platonified [or "scientitized"] games. …

Those who spend too much time with their noses glued to maps will tend to mistake the map for the territory. … I recently looked at what college students are taught under the subject of chance and came out horrified; they were brainwashed with this ludic fallacy and the outlandish bell curve. The same is true of people doing PhD's in the field of probability theory. … [A]ssuming chance has anything to do with mathematics, what little mathematization we can do in the real world does not assume the mild randomness represented by the bell cureve, but rather scalable wild randomness. What can be mathematized is usually not Gaussian, but Mandelbrotian.

Now, go read any of the great classical thinkers who had something practical to say bout the subject of chance, such as Cicero, and you find … a notion of probability that remains fuzzy throughout, as it needs to be, since such fuzziness is the very nature of [real world] uncertainty. Probability is a liberal art; it is a child of skepticism, not a tool for people with calculators on their belts to satisfy their desire to produce fancy calculations and certainties. Before Western thinking drowned in its "scientific" mentality, what is arrogantly called the Enlightenment, people prompted their brain to think—not compute. … (pp. 127-129)

Now let's look at the narrative fallacy. Taleb:

We like stories, we like to summarize, and we like to simplify, i.e., to reduce the dimension of matters. The … narrative fallacy… is associated with our vulnerability to overinterpretation and our predilection for compact stories over raw truths. It severely distorts our mental representation of the world; it is particularly acute when it comes to the rare event. …

The narrative fallacy addresses our limited ability to look at sequences of facts without weaving an explanation into them, or, equivalently forcing a logical link, and arrow of relationship, upon them. Explanations bind facts together. They make them all the more easily remembered; they help them make more sense. Where this propensity can go wrong is when it increases our impressions of understanding. …

We … have a hunger for rules because we need to reduce the dimension of matters so they can get into our heads. Or, rather, sadly, so we can squeeze them into our [strictly limited "working memory]. The more random information is, the greater the dimensionality, and thus the more difficult to summarize. The more you summarize the more order you put in, the less randomness. Hence the same conditions that makes us simplify pushes us to think that the world is lesss random than it actually is.

And the Black Swan is what we leave out of simplification.

Both the artistic and scientific enterprises are the product of our need to reduce dimensions and inflict some order on things. … A novel, a story, a myth, or a tale, all have the same function: they spare us from the complexity of the world and shield us from its randomness. Myths impart order to the disorder of human perception and the perceived "chaos of human experience." …

Our tendency to perceive—to impose—narrativity and causality are symptoms of the same disease—dimension reduction. Moreover, like causality, narrativity has a chronological dimension and leads to the perception of the flow of time. Causality makes time flow in a single direction, and so does narrativity. (pp. 63-70)

Taleb warns us that we can be fooled by our own memory over-writes (i.e. that each time we revisit a memory we alter it a bit), by reconstructed history, by journalists forcing 'cause' into so-called news, by politicians and marketers 'spin' and 'frame control', etc. In short, it is up to each of us to avoid being trapped, blinded by either ludic or narrative fallacies.

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Three The Black Swan reviews: gushy positive (The Econophysics Blog) , positive (Roger Lowenstein, Portfolix.com) , positive (Allen Lane, The Independent), negative (Gregg Easterbrook, NY Times)

I liked the "gushy positive" review, but I'm a contrarian, a chaotician, and a member the dissident band who label themselves Post Autistic in their economic views. More reviews are available via Taleb's Home Page.

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Wikipedia on Gauss
Wikipedia on Mandelbrot
Wikipedia on Taleb

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P.S As per the lead-in "quote": It sounds like something Mark Twain might have said but likely didn't. Still, people sometimes attribute the quote to Twain.

Learning from Nassim Taleb: Knowledge and Ignorance

This last week I have been sorting through 30 years of accumulated books and papers. I've also been reading Nassim Nicholas Taleb's The Black Swan: The Impact of the Highly Improbable. Taleb provides catch-all 'boxes' that easily house most of my "stuff." Loosely the boxes might be labeled: a) Stuff we think we know, but we don't based on faulty reasoning, b) Stuff that 'historians' have force-fit into a false or too-narrow historical molds, and c) Stuff that 'experts' force-fit into too narrowly constructed categories, and we too easily accept as our own.

To Taleb:

… History is opaque. You see what comes out, not the script that produces events, the generator of history. There is a fundamental incompleteness in your grasp of such events, since you do not see what's inside the box, how the mechanisms work. What I call the generator of historical events is different from the events themselves, much as the minds of the gods cannot be read just by witnessing their deeds. You are very likely to be fooled about their intentions. …

The human mind suffers from three ailments as it comes into contact with history, what I call the triplet of opacity. They are:

1. the illusion of understanding, or how everyone thinks he knows what is going on in a world that is more complicated (or random) than they realize;
2. the retrospective distortion, or how we can assess matters only after the fact, as if they were in a rearview mirror (history seems clearer and more organized in history book than in empirical reality); and
3. the overvaluation of factual information and the handicap of authoritative and learned people, particularly when they create categories—when they "Platonify" [that is, when they mistake "the map for the territory, to focus on pure and well-defined 'forms,' whether objects, like triangles, or social notions, like utopias …. When these ideas and crisp constructs inhabit our minds, we privilege them over other less elegant objects, those with messier and less tractable structures …."]

So now I've got more than 20 boxes (file drawers) of papers and several hundred books to deal with. We will have to see how frequently the boxes of papers are visited as time goes by. As for the books, I'll again take my lead from Taleb, as he stresses the importance of books you've not read yet and those you disagree with (i.e. the odd notion that you tend to learn more from those you disagree with than from those you agree with). No doubt there will be more books in the library as time goes by, particularly if I heed:

[Taleb's] … simple step to a higher form of life…. [S]hut down the television set, minimize time spent reading newspapers, ignore the blogs. Train your reasoning abilities to control your decisions…. Train yourself to spot the difference between the sensational and the empirical. … Also bear in mind how shallow we are with probability, the mother of all abstract notions. … Above all learn ot avoid "tunneling."

To be able to foucus is a great virtue if you are a watch repairman, a brain surgeon, or a chess player. But the last thing you need to do when you deal with uncertainty is to "focus"…. This "focus" makes you a sucker….

Decision-making Bias Toward Optimism

Ever wonder why politicians, government administrators and policy-makers, CEOs and other power-brokers tend toward over-optimism and illusions of control? Daniel Kahneman and Jonathan Renshon help us understand why. A sampler:

Why Hawks Win, Daniel Kahneman, Johathan Renshon, Foreign Policy, Jan/Feb 2007: Why are hawks so influential? The answer may lie deep in the human mind. People have dozens of decision-making biases, and almost all favor conflict rather than concession. A look at why the tough guys win more than they should…. Social and cognitive psychologists have identified a number of predictable errors (psychologists call them biases) in the ways that humans judge situations and evaluate risks. Biases have been documented both in the laboratory and in the real world, mostly in situations that have no connection to international politics. For example, people are prone to exaggerating their strengths: About 80 percent of us believe that our driving skills are better than average. In situations of potential conflict, the same optimistic bias makes politicians and generals receptive to advisors who offer highly favorable estimates of the outcomes of war. Such a predisposition, often shared by leaders on both sides of a conflict, is likely to produce a disaster. And this is not an isolated example.

In fact, when we constructed a list of the biases uncovered in 40 years of psychological research, we were startled by what we found: All the biases in our list favor hawks. These psychological impulses—only a few of which we discuss here—incline national leaders to exaggerate the evil intentions of adversaries, to misjudge how adversaries perceive them, to be overly sanguine when hostilities start, and overly reluctant to make necessary concessions in negotiations. In short, these biases have the effect of making wars more likely to begin and more difficult to end.

None of this means that hawks are always wrong…. The biases that we have examined, however, operate over and beyond such rules of prudence and are not the product of thoughtful consideration. Our conclusion is not that hawkish advisors are necessarily wrong, only that they are likely to be more persuasive than they deserve to be.

Several well-known laboratory demonstrations have examined the way people assess their adversary's intelligence, willingness to negotiate, and hostility, as well as the way they view their own position. The results are sobering. Even when people are aware of the context and possible constraints on another party’s behavior, they often do not factor it in when assessing the other side’s motives. Yet, people still assume that outside observers grasp the constraints on their own behavior. With armies on high alert, it’s an instinct that leaders can ill afford to ignore.

…Even when alerted to context that should affect their judgment, people tend to ignore it. Instead, they attribute the behavior they see to the person's nature, character, or persistent motives. This bias is so robust and common that social psychologists have given it a lofty title: They call it the fundamental attribution error.

The effect of this failure in conflict situations can be pernicious. A policymaker or diplomat involved in a tense exchange with a foreign government is likely to observe a great deal of hostile behavior by that country's representatives. Some of that behavior may indeed be the result of deep hostility. But some of it is simply a response to the current situation as it is perceived by the other side. What is ironic is that individuals who attribute others' behavior to deep hostility are quite likely to explain away their own behavior as a result of being "pushed into a corner" by an adversary. The tendency of both sides of a dispute to view themselves as reacting to the other's provocative behavior is a familiar feature of marital quarrels, and it is found as well in international conflicts….

If people are often poorly equipped to explain the behavior of their adversaries, they are also bad at understanding how they appear to others. This bias can manifest itself at critical stages….

Excessive optimism is one of the most significant biases that psychologists have identified. Psychological research has shown that a large majority of people believe themselves to be smarter, more attractive, and more talented than average, and they commonly overestimate their future success. People are also prone to an "illusion of control": They consistently exaggerate the amount of control they have over outcomes that are important to them—even when the outcomes are in fact random or determined by other forces….

Indeed, the optimistic bias and the illusion of control are particularly rampant in the run-up to conflict….

If optimism is the order of the day when it comes to assessing one's own chances in … conflict, however, gloom usually prevails when evaluating another side's concessions. Psychologically, we are receptive not only to hawks' arguments … but also to their case against negotiated solutions. The intuition that something is worth less simply because the other side has offered it is referred to in academic circles as "reactive devaluation." The very fact that a concession is offered by somebody perceived as hostile undermines the content of the proposal. What was said matters less than who said it. … Some of that skepticism could be the rational product of past experience, but some of it may also result from unconscious—and not necessarily rational—devaluation.

Evidence suggests that this bias is a significant stumbling block in negotiations between adversaries…. [U]nderstanding the biases that most of us harbor can at least help ensure that the hawks don't win more arguments than they should.

Cross-posted from Economic Dreams—Nightmares. See also John Quiggin's Pro-War Bias.

Why Can't We Learn from our Mistakes?

In The Limits to Learning, James Montier says that "The major reason we don't learn from our mistakes (or the mistakes of others) is that we simply don't recognise them as such. We have a gamut of mental devices all set up to protect us from the terrible truth that we regularly make mistakes." Don't we ever!

I have decided that in government, in large industry, and in personal endeavors people don't want to study decision-making in part or in whole because it proves much easier to pretend that they know more than they can, or at least to pretend to others that they know more than they do.

In either case, the lucky get rich and or famous, proving up on Kurt Vonnegut's line: "If you would be unloved and forgotten, be reasonable." PS.. The "unlucky" are just collateral damage from the systems, never to be remembered, never to be mourned except by the few who knew them personally and who also tend to be disgusted by the "systems that be," by the "powers that be."

Montier continues by identifying several "biases" that thwart learning:

Self attribution bias: heads is skill, tails is bad luck

We have a relatively fragile sense of self-esteem; one of the key mechanisms for protecting this self image is self-attribution bias. This is the tendency for good outcomes to be attributed to skill and bad outcomes to be attributed to sheer bad luck. This is one of the key limits to learning…. This mechanism prevents us from recognizing mistakes as mistakes, and hence often prevents us from learning from those past errors. …

Hindsight bias: I knew it all along

One of the reasons I suggest that people keep a written record of their decisions and the reasons behind their decisions, is that if they don't, they run the risk of suffering from the insidious hindsight bias. This simply refers to the idea that once we know the outcome we tend to think we knew it was so all along. …

Illusion of control

We love to be in control. We generally hate the feeling of not being able to influence the outcome of an event. It is probably this control freak aspect of our nature that leads to us to behave like [B.F.] Skinner's pigeons. ["Skinner's theory was based around operant conditioning. As Skinner wrote, 'The behavior is followed by a consequence, and the nature of the consequence modifies the organism's tendency to repeat the behavior in the future.'"] ...

Feedback distortion

Not only are we prone to behave like Skinner's pigeons but we also know how to reach the conclusions we want to find (known as 'motivated reasoning' amongst psychologists). …

We have outlined four major hurdles when it comes to learning from our own mistakes. Firstly, we often fail to recognize our mistakes because we attribute them to bad luck rather than poor decision making. Secondly, when we are looking back, we often can't separate what we believed beforehand from what we now know. Thirdly, thanks to the illusion of control, we often end up assuming outcomes are the result of our actions. Finally, we are adept at distorting the feedback we do receive, so that it fits into our own view of our abilities.

Some of these behavioural problems can be countered by keeping written records of decisions and the 'logic' behind those decisions. But this requires discipline and a willingness to re-examine our past decisions. Psychologists have found that it takes far more information about mistakes than it should do, to get us to change our minds.

In a more broadly framed article titled "Part man, part monkey" [PDF: 12 pp.], James Montier helps us understand how our decision-making errors can be traced to four common causes: self-deception, heuristic simplification, emotion, and social interaction. Looking for biases that limit our learning, Montier develops a broader list under his four categories, that he calls a "Taxomony of Biases."