Are Economists Really Clueless about Uncertainty?

Mariano Torras Complexity, General, Methodology/Statistics, Science Leave a Comment

January 24, 2021

I am seriously beginning to think that economists do not understand uncertainty, even what it means. What other conclusion can I draw from responses to my letter to the Financial Times this week? In it, I agree with and applaud a columnist on her jaundiced perspective regarding “expert opinion.” But more to the point, I directly criticize economists’ take on uncertainty by stating:

…In my own field, the meaning of “uncertainty” is limited to complete knowledge of all the possible outcomes and their respective probabilities…

I guess that I did not think this through. In response, a few wise guys professed surprise that “an economics professor” could so poorly understand the fundamental difference between risk and uncertainty. Their point is technically correct, but it also reminds me about the joke in which somebody is traveling in a hot air balloon and descends to ask a passer-by where exactly she is. “Here,” comes back the response; to which the traveler shoots back: 

“You must be an economist.” 

“How did you know??!!”

“Well, what you just told me is both exceedingly obvious and totally useless!”

What’s my point? Yes, my hecklers are correct – what we in economics call “risk” refers to when we know the possible outcomes and their probabilities. Which is what I say about uncertainty in my letter. And, in their defense, economics is explicit that true uncertainty refers to when we do not know these things. They miss the bigger issue, however. In economics we routinely take truly uncertain situations and “translate” them to risky ones.

Why would we do such a thing? Quite simply, if we don’t know much, there isn’t much we can say, at least not precisely. Let’s take global warming as an example. If we don’t have a clear picture of the likely outcomes or their probabilities, what can we say about how big a problem it really is? Not much. But if we described three or four “scenarios,” each with a monetary approximation of the total resulting damage, and assigned each a probability, it would change everything. We would then be able to estimate the monetary value of all the consequences of global warming.

And this is the point that the FT columnist, Jemima Kelly, was making. True uncertainty today is so great in many areas that it is often foolhardy or worse to pretend, with superficial numbers, that we know what we are talking about. In wanting to avoid esoterica in my letter, I became easy prey for my three critics – they must have been economists! But the much more relevant issue appears lost on them and, what is more, I believe they were being sincere. 

This is what really gets me about my profession. Many intelligent people wasting their time exhibiting their “smarts” by fooling around with made-up numbers and making grandiose claims. In other words, if we do not have an answer, “hard numbers” will justify making one up. We can just have uncertainty masquerade as risk. But doing so succumbs to the ludic fallacy:* The mistaken notion that games can adequately model real-life situations. We can model outcomes in games like dice or cards because we actually know the relevant probabilities. But one can’t just “assume” that we know possible real-world outcomes and their probabilities – unless, of course, he/she is an economist. Which reminds me of another joke, but I will save it for another day.

Anyway, the reason I went to the trouble is mostly to warn my readers. If you are reading my blog or other stuff from like-minded people, you are no doubt aware that the challenges humans face seem increasingly complex. But rather than conceding this and putting a premium of enlightened reasoning and (dare I say qualitative) judgment, our leaders double-down on data and computing power in order to arrive at precise, even if woefully inaccurate policy conclusions. I believe that such intellectual dishonesty does not bode well for our future.

*- I should credit Nassim Taleb for pointing this out to me. He provides a few comical examples in his best-selling book, The Black Swan.

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