Jeremy is super smart and one of my favourite ex colleagues from the Fed, but I just disagree with him here. The problem is well summarized by his quotation from Robert Solow: "I’m always a little dubious about an appeal to expectations as a causal factor; expectations are by definition a force that that you intuitively feel must be everpresent and very important but which somehow you are never allowed to observe directly." Most economists like to see themselves as "scientists" who can prove things with hard data, yet the economy is far too complex and nonlinear. They always limit themselves to that which can be statistically proven with the data available. Unfortunately, there just aren't those data available for most things we need to forecast. You need to combine firm theoretical grounding with whatever sources of data or even anecdotes are available and make your best conjecture.
Clive Granger - the Nobel Laureate who taught me econometrics - always said: if you're model doesn't forecast, it's wrong; if it does, you might be right by you haven't been proven wrong." For better than two decades, I've been making educated conjectures as described above and so far, not only have I outperformed the consensus over that period, but I'm unaware of any economist that has a better forecasting track record than me (I keep claiming that, hoping someone will prove me wrong, but it still hasn't happened). So, by Clive's rule, they're wrong; I *might* be right.
Great counterpoints ! Science vs. Scientism :) Hayek’s “The Pretense of Knowledge”-1974
Dueling Mandates :). Your framing of markets economy as complex system is what makes the whole greater than the sum of its parts. As someone who sees the madness of crowds more than their wisdom, through a glass darkly, half empty or full, I liked Rudd’s opening quote :)
“Nobody thinks clearly, no matter what they pretend. . . . That’s why people hang on so tight to their beliefs and opinions; because, compared to the haphazard way they’re arrived at, even the goofiest opinion seems wonderfully clear, sane, and self-evident.”
Dashiell Hammett, The Dain Curse (1928)
Speaking of Long Memory and feedback loops :)
“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”
John Maynard Keynes, 1936
Only a crisis—actual or perceived produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.”
—Milton Friedman, 1982
“It is in the nature of a hypothesis when once a man has conceived it, that it assimilates everything to itself, as proper nourishment, and from the first moment of your begetting it, it generally grows stronger by everything you see, hear or understand.” - Laurence Sterne
“There is no such thing as philosophy-free science; there is only science whose philosophical baggage is taken on board without examination.” — Daniel Dennent
Thanks Marvin - great piece. Loved reading it.l and helpful in organising my jumbled thoughts on the topic a little better…
As well as in building and growing stuff I think there’s also an angle to Overquantification that speaks to the inability of the overquantifier to understand (or profit from) events and trends that are driven by ‘vibes’ or ‘facts over feelings’.
…and my memory is sketchy on this given it’s from a project I did in an art history class 20+ years ago, but I remember artist/poet William Blake had a big issue with who he saw as Overquantifiers and the ascendency of science over art. Sir Isaac Newton was his arch-nemesis in this regard, and his painting Newton II shows Newton hyper focused on the numbers but ignoring the glory of the universe around him, so it’s a phenomenon that’s been about a while!
I'll give you another example: my Themes of "Missingflation" and "Being is believing" are all about expectations-driven inflation that the mainstream of Economics keeps being caught off guard by because, despite inflation expectations being important in theory, most economists will only accept things they can quantitatively measure. Unfortunately, the measures of inflation expectations we have are poor, and most economists tend to focus on the worst one: breakeven TIPS inflation.
I was one of the first to see and document the "Missingflation" of the last decade and again see the non-transitory nature of inflation this decade (as early as November 2020) because I looked at a lot of "vibey" measures in addition to the traditional measures: what consumers were saying, expectations by different economic and education classes, et cetera. As a result, I've called trend inflation pretty well for nearly 20 years, while the consensus and central banks have consistently gotten it wrong.
Quantification matters, but so do vibes. Ignore the latter at your own peril.
Hi Marvin, to the degree that overquantification is a malady of our time, would you accept that economists (present company excluded, of course) have become the high priests / witch doctors of the art, manipulating gullible leaders (especially political) into believing that their insights and presence in the conversation are indispensable?
Related to that, I always felt that economists stepped into a void in the 2010s created by much greater availability of data and (humanities background) decision-makers who needed translators (in U.K. political circles, helpfully initially supplied from the quanty end of their PPE fraternity). This coincided with a crisis of confidence in macroeconomics with the failure to foresee and prevent the great financial crisis and the rise of economists like Steven Levitt who touted Economics’ ability to “explore the hidden side of…everything” (as per Freakonomics), which pushed many more trainee economists into touting their wears to a new audience. As you allude to, as a statistician, I always felt that the sin here was not the attempt to use quantification, but to properly understand and explain its limits (orthogonal dimensions to problems, neglect of uncertainty, over-extrapolation etc.). To what degree do you but that thesis?
On your first point, in one of the greatest ironies ever, Paul Krugman wrote a book in the 1990s, "Peddling Prosperity," indicting economists for the sin you describe of which he was perhaps the worst offender (in my opinion).
On your second point, the crisis might have undermined public confidence in economists, but it simultaneously provided politicians with a great opportunity to get every pet project done and they just needed justification, which economists could provide: Keynesianism, which coincidentally had a huge resurgence in popularity among economists just as politicians demanded it. When you're an economist being handed so much responsibility, of course you have the answer and you are absolutely certain about it! And your certainty comes from estimating a second-order Taylor series solution...
The piece looks at “overquantification” and presents it in a negative light. But overquantification works!
Another lens to look at this is “taking low risk, predictable reward” actions vs. “taking high risk, high chance of loss” actions. The latter *might* also have unusually high reward, but most often it doesn’t. It’s ideal to take these kinds of risks when cost of failure is narrow. “0 to 1” is great when applied to starting individual companies … when society can diversify across all startups and enjoy the benefits of a Tesla and forget just about every name on this shockingly long list: https://en.m.wikipedia.org/wiki/List_of_defunct_automobile_manufacturers_of_the_United_States - most often “0 to 1” fails.
When the current system has allowed the West to largely enjoy decade after decade of increases in peace, wealth and health, taking a gamble on big changes is bad policy. It might be a good way to get noticed by a frustrated electorate though! But let’s not confuse that with good policy. Let’s not laud and idolize crazy risk taking on things with broad, hard to reverse potential downside.
And as countries like Denmark show, you can address specific issues like “we prefer fewer asylum seekers” without broad revolutionary change.
I know the main point of your piece isn’t to apply a value judgement, but to observe what’s happening. I say the above because it’s an important property of what’s happening. In business “most often big bets are wrong and lose money” and “very rarely a big bet has an unusually positive outcome” - so expected value is positive. In running a society it’s not even clear that expected value would be positive.
Thank you for the comment. To be clear, as I note in the piece, developments in quantification has been overwhelmingly positive for humanity, and you are right that for most decisions it will be helpful. I refer to "overquantification" as excessive reliance on those methods, which has led to an evolved dominance across Western institutions of incrementalists who don't know how to take big decisions because they have no experience with it. Just like a natural equilibrium requires both foxes and rabbits, we need both types of decision makers. My point is we have way too many n+1 incrementalists and we're seeing a natural rebound of 0-to-1ers as a result.
I'm not entirely clear when you state "incrementalists who don't know how to take big decisions because they have no experience with it."covers my observation but the predominance of quantitative techniques (largely derived from the social sciences rather than the physical sciences) is per se problematical (irrespective of N+1/0+1 which is another debate in itself!) as the political /policy making arena is largely oversubscribed by a decison ("sic") making class steeped in the humanities and woefully unprepared to assess quantitative analysis.This is exacerbated by the reverse information flow by which the quants themselves are politically directed (by status or grant funding) by said rather inept technocats. who believe ,amongst other things,that science is a noun ("the science")God help us.Don't even get me started on energy policy and the requirement for at least a basic understanding of the physics, engineering and economics of energy sources.
Yes, the problem you highlight is real, serious and makes the overquantification worse. But I would suggest that you understate your case in at least two dimensions.
As an economist who was trained at perhaps the “quantiest” place on earth, two of my greatest pet peeves re: my own profession are (a) that too many economists now “math first, ask questions later” (if at all); ie they apply sophisticated mathematical & statistical techniques without having thought through the theory or the problem they’re trying to solve; and (b) understand the practice of these techniques but not the probability theory behind them.
I was on the fence about writing about this but now will: “overtrusting.” I’ve referenced it before in my work at Thematic Markets, but I just saw a news article that referenced it last night: the most gullible, easily scammed people are the educated! I’m not making this up, it’s a real phenomenon. And overquantification plays a key role in that as it is one of the easiest ways to bamboozle a busy educated person because they’ll assume you must be expert if you’ve done calculations (who has time to check?!😂). I have a backlog of things write about, but you’ve convinced me, this is on the list.
Agreed wholeheartedly-my background is not disimilar-my wake up call was at my "prestigious" London University decades ago and being "educated " by a very well known econometrician who i concluded was a deluded idiot!!!He ended up in the House of Lords!!You've also summarised the whole metropolitan Net Zero argument-surely the science doesn't lie-try explaining the deficiencies "attributive analysis" in cliamte "science" to an ostensibly educated humanities graduate!!!
Excellent work Marvin and readable without the need for a 3rd cup of coffee - always a good test!
Thank you! (Though I have to admit that I didn't know Royal Marines needed a 3rd cup to complete any task.)
Great Expectations :) https://www.federalreserve.gov/econres/feds/files/2021062pap.pdf
Jeremy is super smart and one of my favourite ex colleagues from the Fed, but I just disagree with him here. The problem is well summarized by his quotation from Robert Solow: "I’m always a little dubious about an appeal to expectations as a causal factor; expectations are by definition a force that that you intuitively feel must be everpresent and very important but which somehow you are never allowed to observe directly." Most economists like to see themselves as "scientists" who can prove things with hard data, yet the economy is far too complex and nonlinear. They always limit themselves to that which can be statistically proven with the data available. Unfortunately, there just aren't those data available for most things we need to forecast. You need to combine firm theoretical grounding with whatever sources of data or even anecdotes are available and make your best conjecture.
Clive Granger - the Nobel Laureate who taught me econometrics - always said: if you're model doesn't forecast, it's wrong; if it does, you might be right by you haven't been proven wrong." For better than two decades, I've been making educated conjectures as described above and so far, not only have I outperformed the consensus over that period, but I'm unaware of any economist that has a better forecasting track record than me (I keep claiming that, hoping someone will prove me wrong, but it still hasn't happened). So, by Clive's rule, they're wrong; I *might* be right.
Great counterpoints ! Science vs. Scientism :) Hayek’s “The Pretense of Knowledge”-1974
Dueling Mandates :). Your framing of markets economy as complex system is what makes the whole greater than the sum of its parts. As someone who sees the madness of crowds more than their wisdom, through a glass darkly, half empty or full, I liked Rudd’s opening quote :)
“Nobody thinks clearly, no matter what they pretend. . . . That’s why people hang on so tight to their beliefs and opinions; because, compared to the haphazard way they’re arrived at, even the goofiest opinion seems wonderfully clear, sane, and self-evident.”
Dashiell Hammett, The Dain Curse (1928)
Speaking of Long Memory and feedback loops :)
“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”
John Maynard Keynes, 1936
Only a crisis—actual or perceived produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.”
—Milton Friedman, 1982
“It is in the nature of a hypothesis when once a man has conceived it, that it assimilates everything to itself, as proper nourishment, and from the first moment of your begetting it, it generally grows stronger by everything you see, hear or understand.” - Laurence Sterne
“There is no such thing as philosophy-free science; there is only science whose philosophical baggage is taken on board without examination.” — Daniel Dennent
Thanks Marvin - great piece. Loved reading it.l and helpful in organising my jumbled thoughts on the topic a little better…
As well as in building and growing stuff I think there’s also an angle to Overquantification that speaks to the inability of the overquantifier to understand (or profit from) events and trends that are driven by ‘vibes’ or ‘facts over feelings’.
…and my memory is sketchy on this given it’s from a project I did in an art history class 20+ years ago, but I remember artist/poet William Blake had a big issue with who he saw as Overquantifiers and the ascendency of science over art. Sir Isaac Newton was his arch-nemesis in this regard, and his painting Newton II shows Newton hyper focused on the numbers but ignoring the glory of the universe around him, so it’s a phenomenon that’s been about a while!
Thank you for the kind words! Agreed!
I'll give you another example: my Themes of "Missingflation" and "Being is believing" are all about expectations-driven inflation that the mainstream of Economics keeps being caught off guard by because, despite inflation expectations being important in theory, most economists will only accept things they can quantitatively measure. Unfortunately, the measures of inflation expectations we have are poor, and most economists tend to focus on the worst one: breakeven TIPS inflation.
I was one of the first to see and document the "Missingflation" of the last decade and again see the non-transitory nature of inflation this decade (as early as November 2020) because I looked at a lot of "vibey" measures in addition to the traditional measures: what consumers were saying, expectations by different economic and education classes, et cetera. As a result, I've called trend inflation pretty well for nearly 20 years, while the consensus and central banks have consistently gotten it wrong.
Quantification matters, but so do vibes. Ignore the latter at your own peril.
Brilliant as always.
Thank you, Bill! And thank you for teaching me the catchy phrase “Sharing is caring.”😂
Hi Marvin, to the degree that overquantification is a malady of our time, would you accept that economists (present company excluded, of course) have become the high priests / witch doctors of the art, manipulating gullible leaders (especially political) into believing that their insights and presence in the conversation are indispensable?
Related to that, I always felt that economists stepped into a void in the 2010s created by much greater availability of data and (humanities background) decision-makers who needed translators (in U.K. political circles, helpfully initially supplied from the quanty end of their PPE fraternity). This coincided with a crisis of confidence in macroeconomics with the failure to foresee and prevent the great financial crisis and the rise of economists like Steven Levitt who touted Economics’ ability to “explore the hidden side of…everything” (as per Freakonomics), which pushed many more trainee economists into touting their wears to a new audience. As you allude to, as a statistician, I always felt that the sin here was not the attempt to use quantification, but to properly understand and explain its limits (orthogonal dimensions to problems, neglect of uncertainty, over-extrapolation etc.). To what degree do you but that thesis?
On your first point, in one of the greatest ironies ever, Paul Krugman wrote a book in the 1990s, "Peddling Prosperity," indicting economists for the sin you describe of which he was perhaps the worst offender (in my opinion).
On your second point, the crisis might have undermined public confidence in economists, but it simultaneously provided politicians with a great opportunity to get every pet project done and they just needed justification, which economists could provide: Keynesianism, which coincidentally had a huge resurgence in popularity among economists just as politicians demanded it. When you're an economist being handed so much responsibility, of course you have the answer and you are absolutely certain about it! And your certainty comes from estimating a second-order Taylor series solution...
Hollywood movies are exhibit A for this phenomenon. Who needs the fourth sequel?
Double that! Mission Impossible! is on number eight and getting less realistic (if that's possible) with each iteration: https://www.wsj.com/arts-culture/film/mission-impossiblethe-final-reckoning-review-the-cult-of-tom-cruise-52204be7?mod=hp_lista_pos2
The piece looks at “overquantification” and presents it in a negative light. But overquantification works!
Another lens to look at this is “taking low risk, predictable reward” actions vs. “taking high risk, high chance of loss” actions. The latter *might* also have unusually high reward, but most often it doesn’t. It’s ideal to take these kinds of risks when cost of failure is narrow. “0 to 1” is great when applied to starting individual companies … when society can diversify across all startups and enjoy the benefits of a Tesla and forget just about every name on this shockingly long list: https://en.m.wikipedia.org/wiki/List_of_defunct_automobile_manufacturers_of_the_United_States - most often “0 to 1” fails.
When the current system has allowed the West to largely enjoy decade after decade of increases in peace, wealth and health, taking a gamble on big changes is bad policy. It might be a good way to get noticed by a frustrated electorate though! But let’s not confuse that with good policy. Let’s not laud and idolize crazy risk taking on things with broad, hard to reverse potential downside.
And as countries like Denmark show, you can address specific issues like “we prefer fewer asylum seekers” without broad revolutionary change.
I know the main point of your piece isn’t to apply a value judgement, but to observe what’s happening. I say the above because it’s an important property of what’s happening. In business “most often big bets are wrong and lose money” and “very rarely a big bet has an unusually positive outcome” - so expected value is positive. In running a society it’s not even clear that expected value would be positive.
Thank you for the comment. To be clear, as I note in the piece, developments in quantification has been overwhelmingly positive for humanity, and you are right that for most decisions it will be helpful. I refer to "overquantification" as excessive reliance on those methods, which has led to an evolved dominance across Western institutions of incrementalists who don't know how to take big decisions because they have no experience with it. Just like a natural equilibrium requires both foxes and rabbits, we need both types of decision makers. My point is we have way too many n+1 incrementalists and we're seeing a natural rebound of 0-to-1ers as a result.
I'm not entirely clear when you state "incrementalists who don't know how to take big decisions because they have no experience with it."covers my observation but the predominance of quantitative techniques (largely derived from the social sciences rather than the physical sciences) is per se problematical (irrespective of N+1/0+1 which is another debate in itself!) as the political /policy making arena is largely oversubscribed by a decison ("sic") making class steeped in the humanities and woefully unprepared to assess quantitative analysis.This is exacerbated by the reverse information flow by which the quants themselves are politically directed (by status or grant funding) by said rather inept technocats. who believe ,amongst other things,that science is a noun ("the science")God help us.Don't even get me started on energy policy and the requirement for at least a basic understanding of the physics, engineering and economics of energy sources.
Great article though.
Oh, dear, now you’ve opened a real can of worms!
Yes, the problem you highlight is real, serious and makes the overquantification worse. But I would suggest that you understate your case in at least two dimensions.
As an economist who was trained at perhaps the “quantiest” place on earth, two of my greatest pet peeves re: my own profession are (a) that too many economists now “math first, ask questions later” (if at all); ie they apply sophisticated mathematical & statistical techniques without having thought through the theory or the problem they’re trying to solve; and (b) understand the practice of these techniques but not the probability theory behind them.
I was on the fence about writing about this but now will: “overtrusting.” I’ve referenced it before in my work at Thematic Markets, but I just saw a news article that referenced it last night: the most gullible, easily scammed people are the educated! I’m not making this up, it’s a real phenomenon. And overquantification plays a key role in that as it is one of the easiest ways to bamboozle a busy educated person because they’ll assume you must be expert if you’ve done calculations (who has time to check?!😂). I have a backlog of things write about, but you’ve convinced me, this is on the list.
Thank you for engaging and for the kind words.
Agreed wholeheartedly-my background is not disimilar-my wake up call was at my "prestigious" London University decades ago and being "educated " by a very well known econometrician who i concluded was a deluded idiot!!!He ended up in the House of Lords!!You've also summarised the whole metropolitan Net Zero argument-surely the science doesn't lie-try explaining the deficiencies "attributive analysis" in cliamte "science" to an ostensibly educated humanities graduate!!!
Makes sense. Thanks for your reply.