I’m probably missing something—but when you say the vast majority of active investors do really badly, shouldn’t that be impossible too? If markets are truly efficient, isn’t it just as hard to underperform them as outperform?
DavidA
Karma: 25
Start your own company and hire some software engineers? Only partly humor.
On the externalities example I have also worried that conventional economic treatments also completely ignore corruption. In real life I think you have to assume that the government does not always act like an angel, and therefore there is an additional cost to allowing governments to correct externalities at all. And this cost will not just be limited to the example itself (where the government introduces a sub-par solution to the specific externality in question as the result of corruption), but instead applicable to broad swathes of economic interactions where, once allowed the power to correct externalities, governments may corruptly “correct” situations where no externality truly exists.
It has crossed my mind that Bayesian thinking is especially susceptible to rationalization since, when applied to real world problems prior probabilities are usually very difficult to establish and very easy to rationalize. I am concerned that this may represent a sufficiently severe flaw in “Bayesianism” that it invalidates the entire concept.
I wonder how many readers and commenters here have changed truly deeply held and emotional (e.g. political) views as a result of a process of rational thinking. And if this has not happened, is it evidence of anything interesting?
In reading this it has occurred to me that a good response to someone asking for an “honest” answer might be to ask in return “Why do you want an honest answer?”. The response might provide a guide as to whether or not the questioner really does want an honest answer, and whether or not it is a good idea to supply one.
“Yes, sulfuric acid is a horrible painful death, and no, that mother of five children didn’t deserve it, but we’re going to keep the shops open anyway because we did this cost-benefit calculation.” Can you imagine a politician saying that? Neither can I. But insofar as economists have the power to influence policy, it might help if they could think it privately—maybe even say it in journal articles, suitably dressed up in polysyllabismic obfuscationalization so the media can’t quote it.
This speaks to a very significant issue we face today. Vast swathes of public policy appear to be predicated upon the belief that we can create utopia. So the response to any apparent cost is always to attempt to eliminate it, usually through regulation.
I strongly suspect that not only is utopia an impossible dream, but attempts to regulate it into existence are counter-productive and the end result of such efforts is dystopia.
So I think it is incumbent upon economists not just to think this privately (I’m sure many do), but to say it loudly, publicly and frequently.
Your overall argument is well made.
However I think choosing to use an economic example as your theme may be problematic. Economic studies are basically impossible to conduct rigorously. There can be no controlled, double blind, repeatable experiments. In addition, given the fundamental inteconnectedness of all things (Douglas Adams was a greater man than many people realize), it is extremely difficult to predict what the effects of a change actually are, and therefore what effects need to be measured (at least in order for any results to be usable for policy decisions, where it is necessary to consider all effects, not just a subset of them).
As a consequence at least one school of economics (Austrians) argues that all economic studies are bunk and that only economics based on deductive logic is valid. I’m not sure I completely agree with this position, but I can see where they are coming from, and it is interesting that the current state of economic “science”, based upon such studies, appears incapable of successfully making any useful prediction at all. The Austrians aren’t really any better: they are very limited in the predictions they are able to make because deductive logic limits their models; but at least in their case they know that they cannot make predictions.
For the sake of argument let us reject the Austrian view, and accept that evidence from flawed experiments is better than no evidence at all. Even so we must at least I think accept that all evidence from studies in such a field must be treated exceedingly cautiously and not given the same weight as a laboratory experiment in a “hard” science, or even a well designed psychology study or medical trial. And perhaps this means that we must also continue to give credence to well founded logical theory even when we have some real world evidence that conflicts with it.
So what are the implications of the above thinking when applied to the theme of minimum wage?
(1) Firstly I think that your assumption that the asymmetry of the funnel probably arises from publication bias is suspect. Asymmetry can also arise from a systematic difference between studies of higher and lower precision, or use of an inappropriate effect measure: exactly the sort of problems that we would expect to arise given the real world constraints on economic research. So I think you should interpret the asymmetry not as “probable publication bias”, but as invalidating your use of this funnel plot to draw conclusions without further detailed investigation of individual studies.
(2) The economic law of supply and demand is a very strong and well supported law, both by simple, elegant theory and a great deal of real world evidence. To suggest that it doesn’t apply to the price of labor is a staggering assertion which I suspect you are not making, although your blanket statement “all in all, I think there’s at least some evidence that the liberals are right on this one” seems somewhat misleading to me. To your credit you do identify the many shortcomings of this method, but my interpretation is that these shortcomings which result from attempting to amalgamate the results of studies on different populations, subject to different inputs and measuring different effects are sufficient to render any conclusion essentially meaningless.
(3) Even if we discovered that publication bias is the cause of the asymmetry (which seems unlikely to me and would take a great deal of investigative effort on our part), should we allow these studies to guide policy and raise minimum wages? Surely (at least if we are aiming to maximize utility rather than win votes) the answer is no? We have no idea what other potentially negative effects a change in minimum wage has on the economy, nor do we even have any specific information about the set of circumstances for which our tentative conclusion that raising minimum wage does not impact employment holds true.
I don’t think you need to subscribe to a “Great Men” theory to achieve the same result. All you need to assume is that the number of technological discoveries (or the rate of technological advance) is proportional to the size of the population. This would validate the notion whether 1 in a million is making a discovery or whether everyone makes a discovery.
My own instant reaction, admittedly based entirely on subjective experience, is that the premise of the article is not true. If I and my circle of acquaintances are a representative part of “most people” then “most people” are perfectly happy with the concept of relying on facts to inform and guide decisions.
The problem that complicates my life is attempting to determine what the facts actually are. This has never been easy, but the relatively recent proliferation of human knowledge (i.e. the total number of facts that humans collectively know) has made this job much more complex.
As an aside, it is an interesting thought that perhaps this very complexity implies that collective human knowledge tends to a maximum limit over time, and it would of course be at least theoretically possible that such a limit might fall below the threshold for creating AGI, which might explain why we haven’t encountered one yet (if indeed we haven’t) :-).
Bact to the issue at hand . Clearly I am not able to investigate every phenomenon myself so I am forced to rely on others. But who should I rely on?
the media have long since surrendered their right to my trust
politically funded NGOs are lie machines churning out narratives that support a political position irrespective of underlying reality
sadly it increasingly appears that academia is no longer trustworthy either. Corrupted by corporate profit incentives, the grant system, academic politics, and the outsized incentive to publish exciting results, our scientists have systematically engaged in questionable methodologies until we have reached the point where, according to recent studies, the majority of published articles turn out to be unreproducible. (Another aside: I have also wondered whether we are over-funding academia, resulting in too many scientists of only medicore intelligence who actually act to retard collective understanding, much as an unskilled engineer can reduce the productivity of a team of more skilled engineers).
it is also true that many disciplines are, for ethical reasons, hard to subject to rational enquiry. When controlled experiements cannot be conducted easily or at all, the “facts” are very, very hard to determine, and it is all too easy to reach conclusions which result only from long chains of complex and sophisticated rationalization. Economics is especially prone to this, which is probably why economists are notoriously unable to make acccurate predictions. And consequently, for example, I find the idea that a Brexit supporter must be ignorant of “facts” to be very questionable.
It often requires a great deal of knowledge to even understand and apply facts correctly. For example, in any internet discussion on the benefits of free trade it is almost inevitable that someobody will cite Ricardo’s Theory of comparative advantage within the first couple of posts. Such an individual may well claim that this is a “fact” which “proves” that free trade is a good idea and rail at the ignorant fool who persists in further disagreement. But of course Ricardo’s theory, while certainly clever, pertinent and logically correct does not by itself prove that free trade is beneficial. It completely ignores the impact of free movement of capital, specialization of the labor force, changes to the value of pre-existing capital investments, the marginal value of dollars to the inevitable winners and losers, and many other factors and consequences.
I can’t help thinking that in order to overcome this problem we need a massive cultural shift towards a more deontological system of ethics: a commitment to finding and telling the truth no matter what it is and a refusal to tolerate liars, even when we are sympathetic to their aims. Perhaps that way we can start to trust our journalists and our scientists again—which would make all our lives massively easier.
Well that works if you wait until you get an answer and then make adjustments. But I think most people (hopefully at least) manage to avoid that degree of bias. But there’s still the issue of how you determine the prior probabilities in the first place—after all it’s not like you can’t make a good estimate of what sort of numbers are likely to produce the result you want before you ever do any calculations at all.