Thursday, October 17, 2013

abstract principles

If an abstract principle is any good it should coordinate available concrete information in an unambiguous, coherent way. This works best in maths and some of the sciences (though some branches of physics don’t do as well as you might think). In social science it’s basically impossible to articulate abstract principles that will satisfy everyone, but that doesn’t mean we should try or that we think of better or worse abstract models. In the case of economics I often see people moving quickly from noting shortcomings of economic models as if that somehow supported their own opinions. The weaknesses of the models show that economics is hard, not that you know better.

In the case of economics, there are a bunch of economic principles which economists basically agree on and many people can accept when stated as a general principle, but get totally overridden when comes to particular cases. Here’s a list of 15 economic principles from a speech given by a journalist I really like. Some of the principles are obvious enough to seem like common sense rather than “economics” but people, including politicians, deny them all the time! My past few posts may be boring but I don’t really expect that there is a lot to get worked up about one way or another. This post is different though. I’m trying to argue that we’re wrong to let the emotional effect of special cases override abstract ideas we should believe are true. 

Maybe the most obvious one is that demand curves slope downward. In general, raising the price of something lowers the demand for it. There are some obvious exceptions to this rule like luxury products where low prices can be seen as a bad signal about quality which can affect demand. There are also less obvious exceptions to the principle like the idea of a “Giffen good”. If the price of a staple food like rice increases people might buy more of it because they have less money for nicer food and rice is still the cheapest thing around. How far do these exceptions go in invalidating the idea that demand curves slope downwards? Not that far I say, maybe we need to stay on our toes when applying the principle but still, I think that not assuming it’s generally true would be crazy. 

Now how about the demand curve for labour? Does that slope downwards? If putting it that way is a little boring, how about, “should we get rid of the minimum wage?” If it seems really obvious that we shouldn’t get rid of it, why is that? Does raising the price of labour not reduce demand for it? Or do we think of rich employers and poor employees and see that it’s just obvious that employers should pay more?
Now maybe the potential downsides of a minimum wage are worth the costs, but if you think it’s obvious that a larger minimum wage won’t result in less job seekers finding low skilled jobs, your belief is in tension with a pretty fundamental economic principle. I have seen lots of arguing in favour of the minimum wage, but I see much less recognition of this basic tension.

On Monday Eugene Fama shared the Nobel Prize partly (primarily) for his work on the efficient markets hypothesis. “Efficient” makes it sound like markets are “good” but the EMH is compatible with bad outcomes. The idea is that markets are good at taking the available information into account. Basically, when someone tells you about a hot new stock that you have to buy you can basically just ignore them. The trouble is that in conversation when someone is trying to convince you about their stock, they will definitely have more information about it than you. They will be able to give you a detailed argument in favour it that you will not be in a position to pick apart, but you are still justified in ignoring their advice. The world is a complicated place and there are lots of people out there smarter than you trying to be clever about what stock to pick. The odds that your salesman is the special one, who really knows, are really low.

I’d guess that most educated non-economists (and plenty of economists) think that the EMH is just plain wrong and many think that it’s so obviously wrong that they are genuinely surprised  to discover that it’s actually a thing. There are some people who do seem to be special and there are apparent exceptions where the EMH doesn’t seem to hold. But the fact remains that it is incredibly difficult to beat the market. Lots of very clever people devote their lives to doing this and very few succeed. Just like some exceptions to demand curves sloping downwards doesn’t mean we should chuck away the basic idea, same with EMH, even if the dude selling you his stock is really convincing. Once you give up on the quest for exceptionless certainty these principles are very powerful and can help understand the world and I think we should resist the emotional appeal of cases that seem to clash with them. 

P.S. Link to the 15 principles is there now. 

6 comments:

Sid said...

Like. This was nicely written. Written in a way that even *I* could understand.

Stuart said...

Even *you*?!

Thanks :)

Unknown said...

Nice One. Thanks Winks. This is great. I enjoyed reading Trees and Forests, Concrete and Abstract Thinking, and Abstract Principles. I have two minor comments, and then a major/general/captain comment.

1) “the plural of data is not anecdote”. I haven’t heard this quote, but shouldn’t it be “the plural of anecdote is not data” ? (And I think “data” is the plural of “datum”. Which is why you ought (pedantically) to say: “the data are convincing”, rather than “the data is convincing”. Saalih pointed this out to me.)

2) The second is a subtlety that doesn’t contradict anything you say, but points toward a conclusion which might be too easily drawn from your words: “Emotion and Rationality are at odds with one another”. I think it is important to emphasize that it is perfectly possible to be a healthily emotional human being, and at the same time be completely rational. Indeed, cognitive science has shown that rationality relies on the efficient functioning of the ‘emotional centres’ of the brain.
In “Trees and Forests” you say “unless the ref is actually fixing the match, the second reaction [these things balance out in the end] is actually sensible while the first reaction [going bananas with indignation] is just plain wrong.” I think it so important to emphasize that it is not the REACTION that is wrong, but your RESPONSE to your reaction. In my ideal world we would all still shout obscenities at the ref, but when it came to his performance evaluation we would all be quite capable of stepping back and saying that he did a good job. It is this seemingly contradictory interplay between “emotion” and “rationality” that also makes me want to say that, in LIFE, “we should NOT ALWAYS want the big picture and the low level detail to be part of the same coherent story”. In academia, we should certainly demand this type of coherence. However, when it comes to LIFE, I think coherence is overrated...but that is perhaps another discussion.
You also say: “…we need to actively resist the emotional force of particular events and let more impersonal, abstract truths guide our beliefs”. I would just like to be clear that it is not the EMOTIONS that we are resisting, but the part that emotions have to play in our subsequent behaviour/reasoning.
I don’t think this is at odds with what you were saying, but if your words became ‘biblical’ I could imagine your followers shutting down their emotional selves in order to be more ‘right’. (If you are in a committed relationship and you look at an attractive woman, it is not your physical/emotional reaction to her attractiveness that is to be scrutinized, but how this reaction figures in your subsequent behaviour.)

Unknown said...

Major/General/Kaptein:
Why did you use the title “Concrete and Abstract” thinking and not “System 1 and System 2 thinking” or “Emotional vs. Rational Thinking” or “Intuitive vs. Rational thinking”. I feel that by using the word “concrete” you have further muddied the waters (albeit in a productive way! I’m not sure if there is an idiomatic expression that better captures the notion of making things messier in order to facilitate progress?) of the whole abstract vs. concrete debate.
As of 8th October 2013, Torr and Southey had summarized the “Concrete vs. Abstract” distinction into the following workable categories:
ABSTRACT CONCRETE
intangible tangible
general particular
unfamililar familiar

You have now added an important 4th dimension: that of the emotional vs. the rational. While I liked the parallel between the notion of “abstract principles” and “rationality”, I don’t like the word “concrete” being tied to emotional/intuitive thinking.
This may simply be a reflection of my dogged determination to tie the notion of concrete firmly to the notion of the tangible. “Emotional thinking” (is this a phrase that you like?) certainly satisfies the criteria of being both familiar and particular. However, it is quite possible for a person’s emotional response to a situation to be as a result of reading a fantasy novel (or a fairy tale) which deals with an analogous scenario.
That’s my 5 cents. Please be patient with me.

Stuart said...

Thanks for the comments Phil.

1) I did pick up my mistake about data/anecdote which is why I added this bit (*It definitely isn't! What is the plural of data?). Maybe I should have just corrected it but I thought it was funny. I know that data is plural but what is the plural of data? Datas?

2) I’m sure you’re right. I ended up writing much more than I had planned and almost everything was about cases where the general principle is “right”. I did mention how this is not always the case and I deleted other cases. One of the takeaways (that I drew even if I didn’t articulate well) from my masters is to resist privileging one type of reasoning over another (near and far). There is basically a reason we have these two different modes of thinking, because they are both useful. Was simply talking about cases where they conflict and I argue the one mode is better.

“REACTION that is wrong, but your RESPONSE to your reaction” I sort of agree. but I thought I was saying that. The outrage continued way past the actual game. Our emotional reactions in sport don’t have to be rational, but that doesn’t mean that all reactions are OK. I’m not sure we’d enjoy the game less if we could keep in mind that refs make mistakes. I think the reactions are often undignified and pathetic in a pretty disturbing way.

“ I would just like to be clear that it is not the EMOTIONS that we are resisting, but the part that emotions have to play in our subsequent behaviour/reasoning.” I am not arguing against emotions. I’m not 100% clear on what you mean here. People have plenty of unsavory emotions. They have emotional reactions to gay sex etc. Is it really necessary to distinguish between resisting the emotion and resisting the negative behaviour/reasoning it might inspire? I think we should try to train ourselves to have DIFFERENT emotions.

Stuart said...

“Please be patient with me.” Nice try. But I refuse.

As acknowledged proofreader of my thesis you know that DPT and CLT are different things. I am using concrete and abstract because I am thinking about CLT and not DPT. I don’t feel like I have introduced a 4th dimension. emotional can be abstract and rational is often concrete. In fact, my examples of abstract principles includes demand curves and EMH where I want to be able to resist detailed argumentation as in the case where some dude is trying to sell you something. emotion can be pretty abstract and “far” regret is a far emotion.