From: olshen@biostat.washington.edu (Adam Olshen)
Subject: Re: Economics and the Dart Board 
Organization: Biostatistics, School of Public Health, Univ. of Wash.
Date: Sun, 13 Dec 1992 07:40:03 GMT

In article <724180390snz@keris.demon.co.uk> chris@keris.demon.co.uk (Chris Croughton) writes:
>
>In article <1992Dec10.162703.1015@kadsma.kodak.com>
>            pajerek@telstar.kodak.com writes:
>
>>In article <Bz0F48.FuE@usenet.ucs.indiana.edu> jwales@silver.ucs.indiana.edu
>> (jimmy donal wales) writes:
>>>I've seen a particular kind of argument here lately, which purports to
>>>show that economics is not a science, or is not a scientific discipline.
>>>While I do think that that point is open to some debate, I just want to
>>>point out that the particular kind of argument I have seen here is not
>>>valid.
>>
>>I agree that a 'science' need not be able to *predict*, but it must
>>always be able to *explain*. Peter may not accept this. He often
>>insists on the 'predictive value' of the hard sciences, and either
>>states or strongly implies that a body of theory that can't produce
>>reliable predictions is 'not science'.
>
>No, no, NO!  Science does *not* explain, for instance, *how* gravity
>works.  It *predicts* that it will work, and the success of the theory
>is based on how well its predictions match observations.
>
>The scientific method is:
>
>a)  observe facts
>b)  correlate observations
>c)  deduce theories which fit the observations
>c)  predict new tests from the theories
>
>and repeat as necessary.
>
>So we observe that things move towards one another, correlate those
>observations to find in what way they move, deduce a theory which fits
>those observations, and then predict future testable observations.
>

I agree.  If you cannot predict future events, how do you know your
explanation is correct (or at least better than those that have come
before)?  A typical news report will say "stock prices fell today on
fear of a rise in interest rates."  I can sit at home and say that the
real reason for the drop was a report of a slump in new housing starts.
There is no way of determining which is a better "explanation" of the
stock drop, except through anecdotal evidence (say interviewing major
players in the stock market).  

>That is why Newton's "Laws of motion" were correct theories for a long
>time, because they gave good predictions.  When the equipment advanced
>so that it could be seen that there were differences between the
>predictions and the observations, it had to be superceded.
>
>The original poster claimed that the only valid theory 'predicts' that
>share prices will be random.  In a way, that's a valid prediction.  But
>it's not testable, because 'random' means 'unknowable'.  And it's not
>usable...
>

I don't think this is correct.  It is possibly random whether prices go
up or down in a certain period (a so-called "random walk"), but the
magnitude of the changes is not random.  For instance, I predict the average
stock price will not change by more than $20 a share in the next week.  I
might be wrong, but I would bet every dollar I have on it.  

Secondly, one cannot "prove" randomness, but rather fail to reject the
hypothesis of randomness.  To do this one would have to find a pattern in
share prices.

>A valid theory of economics should say something like "The values of the
>inputs to the system are not predictable - however, given certain inputs
>we predict that the system will do such-and-such".  The same as I can
>say "I don't know when or if the driver of a car will slam on the
>brakes, but if he does, the car will skid".  That is both usable and
>testable - I can use it to design a safer car, or to warn the driver,
>and I can test it when someone *does* slam on the brakes.
>
>The trouble with the economic theory mentioned is that it is not usable
>unless you have a dartboard and a copy of the Wall Street Journal (and
>are able to hit the dartboard <g>).  And even then, it says that you
>might just as well not bother (in fact it's better if you don't throw
>the darts - you might hit the cat).  So all these financial people are
>wasting their time (and our money)...
>

I think the problem is that there are too many inputs necessary to make
predictions that have small enough error to be of practical use.  Or, 
similarly, that we don't know which inputs to use.


>Incidentally, I wouldn't claim that the scientific method is infallible,
>or the only method for arriving at 'truth'.  Certainly, it can't answer
>questions about religious or moral issues, as they seem to be purely
>subjective (i.e.  I know what *I* believe, but there's no way that I can
>prove it to you unless you already share my basic feelings).
>
>***********************************************************************
>*  chris@keris.demon.co.uk      *                                     *
>*  chriscr@cix.compulink.co.uk  *  FIAWOL (Filking Is A Way Of Life)  *
>*  100014.3217@compuserve.com   *                                     *
>***********************************************************************

Adam Olshen
olshen@biostat.washington.edu
A guy who became a statistician instead of an economist when he realized
economists could not tell the future while statisticians occassionally
can.

Newsgroups: alt.politics.libertarian