Archive for the ‘Models’ Category
Jeff Miller has done a couple of nice posts on “A Simulation of Angel Investing” here and here. I think it’s terrific that Jeff actually asked the question and tried to answer it with simulation. However, his answer of 20 is way too low because of two key oversimplifications. Using a more sophisticated methodology, I’ll show that a better answer is 100 to 150.
I apologize for the non-existent blogging the past few weeks. I’ve been really busy with my new company. I’m going to try blogging more short items rather than my trademark essays in the hope that reduced barrier to entry will result in more supply.
First up is a provocative post by the ever-interesting Scott Sumner. Rafe in particular should read it because Sumner starts from one of Rafe’s favorite premisse that “laws” of nature are purely cognitive constructs. We should measure them by their usefulness and not ascribe to them any independent existence. So Newton’s laws of motion are useful in certain contexts. Einstein’s are useful in others. But neither are ground truth. Moreover, we will never find ground truth. Just successively more accurate models.
Sumner uses this bit of philosophy to justify abolishing inflation, not, “…the phenomenon of inflation, but rather the concept of inflation.” More specifically, price inflation. He explains why this concept is ill-defined and not only unnecessary, but confusing, for understanding the macroeconomy. He asserts that we should expunge it from our models. It doesn’t really exist anyway, so if models do better without it, we won’t miss it in the least.
I try not to practice false modesty (those of you who know me well probably just did a spit take at that understatement). So while I try to stand up and admit when I’m wrong, I also like to stand up and point out where I’m right.
It shouldn’t be a surprise to any of you that I came to the conclusion that climate models are pretty much total bullshit. My problem with them is that they are incomplete, overfitted, and unproven. It turns out that one of the foremost experts on forecasting in general also thinks that these models have no predictive value. In fact, items (6) and (7) of their statement shows that you can predict the future temperature really well simply by saying it will be the same as the current temperature.
You can read their more formal indictment of climate forecasting methods here.
How Our Moral Compasses Fail Us
From the comments on my Introduction to this series, it appears I have discovered a controversial topic. Good. My first objective will be to illustrate why we cannot rely on moral compasses to guide society. After some thought, I have decided to break the topic of moral compasses into two posts: how they fail and why they fail.
I was recently having a conversation with a mutual friend of Rafe’s and mine. Like the two of us, he’s quite smart, well educated, and socially aware. I respect his thinking a lot. However, during the course of this conversation, it became clear to me that he holds what I think of as an overly moralistic view of human behavior.
From my perspective, it seemed like he thinks that people’s behavior is governed primarily by an internal moral compass rather than incentives. So if you want to change their behavior, you should redirect their moral compass rather than adjust their incentives. People who don’t adjust their behavior are defecting from society and should be sanctioned.
I encounter this view quite often in my social circle and this instance inspired me to write a series of posts to explain how I think things actually work. You’re free to disagree with me, of course. In fact, I expect most people to disagree with me. But I’ve thought rather hard about this issue and I’ll put my model up against the moralistic view when it comes to predicting a population’s average behavior or choosing an effective policy prescription.
Remember Liar’s Poker by Michael Lewis about 80s Wall Street excess? Well, he has a terrific article on some guys who saw the subprime meltdown coming and bet heavily on it. It’s great narrative and a reminder that whenever someone’s model departs substantially from reality, there is an arbitrage opportunity. Hey, maybe we should rename this blog “Reality Arbitrage”.