Saturday, October 29, 2011

We Keep Plugging Arrogance into the Models

We cannot build economic models that allow us to predict what will happen (tip to Instapundit, I think):

When it comes to assigning blame for the current economic doldrums, the quants who build the complicated mathematic financial risk models, and the traders who rely on them, deserve their share of the blame. [See “A Formula For Economic Calamity” in the November 2011 issue]. But what if there were a way to come up with simpler models that perfectly reflected reality? And what if we had perfect financial data to plug into them?

Incredibly, even under those utterly unrealizable conditions, we'd still get bad predictions from models.

Yet we have people here who think that if we can just be more scientific about the whole thing, we can guide the economy to prosperity without those annoying recessions that pop up.

The fact is, the enlightened and scientific hand is not capable of matching the unseen hand (which consists of the aggregate decisions of hundreds of millions of people).

Sadly, the urge to guide us is strong and never goes away in some quarters.