Two Views (?) On Using Bets to Test Economic Theories
Back in December, when Brad DeLong said I needed to study at the feet of Krugman because I lost an inflation bet to David R. Henderson, and then Bryan Caplan objected to the tone of the statements, Daniel Kuehn wrote:
I thought the whole point of betting on predictions was to weed out BS and test theories.
Now when people actually propose that some of that actually goes on Bryan Caplan – a big advocate of economic blog betting – finds it “frankly deplorable” and calls it “cackling with glee” instead of… you know… just hoping that betting will do what you all think it will do.
Now, when Bryan is asking Keynesians to explicitly bet with him because they keep saying how much better their model predicts things, Daniel writes:
Bryan Caplan is promoting bets on Keynesian theory – encouraging Keynesians to put their money where their mouth is.
He is concerned that the only bets around are about inflation, and that you don’t have to be a Keynesian to think inflation will stay low.
True enough but this kind of gets at the heart of the problem, right? If it’s hard to get detailed empirical analyses to tease out a distinction between theories, how can you expect a bet on any kind of headline indicator to? There is a lot of other stuff going on out there and in particular a lot of endogeneity.
If you’re someone that would bet that when government spending goes up output will go up (this is what Bryan suggests) – without cleaning up the endogeneity bias – then you really don’t understand how economics works and shouldn’t be betting on it in the first place.
You certainly shouldn’t be representing Keynesianism with your bet.
Bets are great for getting people to be more serious about the claims they make, but I think the proponents of betting vastly overestimate how useful it is.
Not an outright contradiction, but a Kuehn Kontradiction? A Daniel Double-Take?
Anyway let’s leave him alone. Soon enough he will be punished by a sleep deprivation experiment.
Daniel needs his own Daniel Kuehn to explain things.
Don’t we all?
I’m going to go out on a very, very long limb and say probably not.
This is one of the unfortunate things that happen when you put appearances above truth regardless of the consequences to appearances.
I expect a Daniel Double-Down on appearance formation.
He’s so objective and unbiased in his analysis!
Caplan also looks for betting frequency, which I think helps alleviate Daniel’s concern in the second excerpt you post. Someone that doesn’t know much about economics, but still gets a bet right once, is more likely to have a higher amount of betting failures over a proper sample size.
This is a good point (first I’ve read on the thread so far!). Even if you can’t test a single theory (a ful one – like Keynesianism or monetarism) in a single bet, there should be variability across outcomes so that you could have a bunch of different bets that get you somewhere.
The problem there being that they are likely to selectively report their results. This was an issue in the pharmaceuticals industry to such a degree that in recent years they have been forced to register every sample group… just to prevent selective reporting.
Bob,
I saw your MMT debate announcement. Thought I’d throw you some links to help you out. Here are three recent critiques of MMT. The first one by Cullen Roche is long, but very detailed. Roche is an MMT expert.
http://pragcap.com/mr-different-from-mmt
The other is from a post-keynesian named Thomas Palley. He’s also very well versed in MMT.
http://www.thomaspalley.com/?p=322
The last one is from Marc Lavoie who’s another PKer. He’s very sharp.
http://www.boeckler.de/pdf/v_2011_10_27_lavoie.pdf
Good luck!
I have no problem with people making bets, and yes if someone can consistently deliver better predictions than other people, this indicates they have a better model. Mind you, like playing poker, winning one hand does not make you a genius… it is consistency over many hands that gets difficult.
I will point out that if you even take a small grain of Austrian theory, you would have to conclude that all market participants are, in effect, betting against one another all the time. At least, all people who are attempting to save and/or invest. Putting stores away during harvest time is a bet that you won’t be able to grow a crop in the middle of winter. Buying treasury bonds is a bet that you couldn’t get the same combination of earnings and security by some other means.
Tel, I agree with you on this for the most part. I think the bets are a display of putting your money where your mouth is, but the complexity of the economy makes it easy (and maybe justifiable) to find an excuse when you lose. I think Daniel (and probably everyone else) understands that, but still want to make it out to be highly meaningful when Bob lost his bet.
And on the second part, too. Capitalistic transactions typically require that two people disagree. The seller thinks the money is worth more than the product and the buyer thinks the product is worth more than the money. AND they are often both right, because value is subjective. I realize disagreeing isn’t exactly betting, but betting is disagreeing with whatever the alternative is.
re: ” I think Daniel (and probably everyone else) understands that, but still want to make it out to be highly meaningful when Bob lost his bet”
I think you might be confusing me with Brad DeLong.
What was meaningful about Bob’s lost bet is that he really ought to have taken it as an opportunity to revise his views either of the determinants of inflation or of the likelihood of determinants he had already acknowledged coming to pass given the economic environment. That’s fairly substantial, but it’s not the same as abandoning Austrianism. No inflation bet could accomplish that (see my second post).
Or perhaps revise his views on the time involved for such events to come to pass. I’m still expecting a wave of inflation, I think Bob just jumped in too early. The printing continues to happen… Fed exit strategy, remember?
True but the longer you put that horizon the more everyone’s going to agree there will be some inflation! There will be no one to bet against!
Monetary policy lags ought to be half a year or so.
The really interesting bet is between the people that thing five years after the crisis was plenty of time for it to happen and people who think it wouldn’t happen for other reasons.
Egat! Where does that come from?
No, I promise not to mix you up with Brad. I can’t speak for Bob, but my view is that additional determinants appeared after the bet that weren’t there at the time of the bet (IOER, Europe…). International demand for US currency is an especially odd variable to throw in and will also complicate the unwind of monetary expansion.
I think that the large number such variables make prediction largely un-meaningful, but not totally useless.
Personally, I did change my own views as a result of the absence of inflation. M3 is now a major prior for me. IOER, Dodd-Frank, Basel3, and bank lending caution (is it even half smart to make loans at record low interest rates??) are putting major downward pressures on bank money supply. I assumed in the past that money from the fed was multiplied by ten when it hit the banks, due to leverage. Now, I think bond buying hits the post-leverage side of the ledger.
But how I see Bob’s bet is that he bet that if someone turned on the hose to a pool, the level would rise on the other side… then a bunch of REALLY fat people got out of the pool on the other side. He looks wrong right now, unless the fat people decide to do a group belly flop.
In the first part he is not saying that he himself is in favor of betting re economic predictions (he’s saying that Caplan is saying that and that therefore he finds Caplan’s comments on the responses to the Murphy-Henderson bet odd), so when he says in the second part that betting is deeply problematic because of the complexity of the economy, he’s not contradicting himself at all.
Narrator:
(A) I didn’t claim actual, outright contradiction, just Kontradiction.
(B) That quote by itself wasn’t the best. At the time, Daniel was very understanding of DeLong and Krugman unleashing hell on me, and Daniel wanted me to change my model.
Well, at the time I also thought you were making too much of throw-away lines like “worshiping at the feet of Paul Krugman”. You throw in goofy lines like that to your posts all the time. NBD.
Granted, our recent email exchange with him was both enlightening and disappointing.
Not sure. I always took a Krugman Kontradiction two mean two statements (often separated in time and space, at least one of which was deliberately (either indirectly through rhetorical / manipulative habit or in a direct and conscious action) written in such a way that when you casually read both statements, they seem to contradict one another, while if you read them much more closely you perceive that there is a possible way to interpret at least one of these statements so as to mean something that is in fact not in contradiction with the other statement.
The usual purpose of a Krugman Kontradiction is to create an impression in the reader that one can however always plausibly deny was one’s intention, or to create enough wiggle room in one’s dicourse so that one can be confident to always have a non-impossible answer to a charge.
Daniel’s statements here meet (at best) only the criterion that at least for one person they seemed to be in contradiction with one another, but none of the other criteria.
Bob wrote:
“(A) I didn’t claim actual, outright contradiction, just Kontradiction.”
Yes, but so I think an essential element of a Kontradiction is a deliberate (either through habit or direct conscious action) will to deceive. And that was missing in this case.
“(B) That quote by itself wasn’t the best. At the time, Daniel was very understanding of DeLong and Krugman unleashing hell on me, and Daniel wanted me to change my model.”
Yes, and I still find it incredible how he could not be made to see or admit the correctness of your point that your bet was with another ‘Austerian’ undermined DeLong’s and Krugman’s claims.
That’s true – I was a little shocked that Caplan of all people would waver like that.
But there’s still a fundamental difference between testing a view of inflation and testing an entire body of theory like Keynesianism, Austrianism, or monetarism.
I never, ever said that an inflation bet is the death knell for Austrian economics. Never. So that’s perfectly consistent with the second post.
I wrote the first post because it seems we can bet on what inflation will do – and if one person’s theory of inflation predicts high inflation and another’s predicts low inflation we can test that.
If you can tell me how to differentiate market monetarism from monetary disequilibrium Austrianism from Keynesianism using an inflation bet you let me know and I’ll do a retraction of the second post.
Otherwise there is absolutely no contradiction.
You can’t bold the word “theory” in both posts and expect to have done your job. You need to actually process what I’m arguing in each post.
Italicize the word theory I guess I should say… although in my google reader only that is italicized while here everything is… huh.
“If you can tell me how to differentiate market monetarism from monetary disequilibrium Austrianism from Keynesianism using an inflation bet you let me know and I’ll do a retraction of the second post.”
I think Krugman, and definitely DeLong, would be able to help you with that. After all, they want Bob to abandon his entire theory because of future guesses on inflation.
OK, I’m not going to make my point on this one for the 100th time. 99 times (a rough estimate) was enough. If you don’t get it, you don’t get it.
Sorry, I guess I just don’t visit your blog enough to see what you are saying you have explained 100 times.
Try this thread MF
Daniel, I admire your patience. At this point I’d have expected you to be offering him a rope not a thread.
Funny, because I thought I was being patient.
Don’t see any explanation.
I see words and letters, but that’s different.
Why should we praise someone who makes a small bet with very bad terms when he could have made a much larger bet with much better terms? Until these bets start to get serious I think they should be regarded as a cheap way to fake taking action rather than the real deal.