Daily Archives: September 6, 2009

A Programming Problem

In today’s New York Times, in the magazine, Paul Krugman asks, How Did Economists Get It So Wrong? In the article he recounts how it happened that the world’s finest experts in macroeconomics were unable to adapt their models and, in doing so, develop better models able to predict the housing market implosion.

In my earlier post, the Second Order position vis a vis belief was explored. There are many ways to describe a Second Order belief. One way says: such a belief is a knee jerk reaction. Another option says: such a belief automatically follows from a specific predisposition. Enter an internalized model of any kind into the fundamentals of a predisposition, then where there is Second Order belief derived from the model, it follows inevitably from the model.

In other words, the model, in effect, programs the belief. Idealized programs very often generate idealized, absolute beliefs about the model.

Krugman:

1.
But the self-described New Keynesian economists weren’t immune to the charms of rational individuals and perfect markets. They tried to keep their deviations from neoclassical orthodoxy as limited as possible.
2.
But there was something else going on: a general belief that bubbles just don’t happen. What’s striking, when you reread Greenspan’s assurances, is that they weren’t based on evidence — they were based on the a priori assertion that there simply can’t be a bubble in housing.
3.
In short, the belief in efficient financial markets blinded many if not most economists to the emergence of the biggest financial bubble in history.

What would you say about a model purported to model macroeconomic actuality, where total belief in the model itself causes the model user to be blinded to particular actualities? What would you say about the nature of total belief in any blinded model. Apparently, best and brightest economic experts can come to be irrationally exhuberant about their own models.
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