{"id":23812,"date":"2012-12-18T11:22:26","date_gmt":"2012-12-18T16:22:26","guid":{"rendered":"http:\/\/timesandseasons.org\/?p=23812"},"modified":"2014-01-31T08:40:04","modified_gmt":"2014-01-31T13:40:04","slug":"on-learning-from-false-models","status":"publish","type":"post","link":"https:\/\/timesandseasons.org\/index.php\/2012\/12\/on-learning-from-false-models\/","title":{"rendered":"On Learning from False Models"},"content":{"rendered":"

[This is Part 3 of a 4-part series. Part 1<\/a>.\u00a0Part 2<\/a>.\u00a0Part 4<\/a>]<\/p>\n

In this post I want to present a secular example of epistemic humility. As with the religious example<\/a>, I hope that this one will also provide some intrinsically interesting ideas. I also plan on reusing these ideas in the next couple of posts.<\/p>\n

Like my first example, the second highlights the fertility that arises from knowingly maintaining contradictory views. In this case the conflict is between the highly stylized model of human behavior used by economists (homo economicus<\/em><\/a> or the rational agent<\/a>) and real, live human beings.<\/p>\n

It was John Stuart Mill and Adam Smith who put homo economicus through an early beta stage, but it was the generation of economists writing in the early 20th century who created version 1.0 of this model by rendering it mathematically precise. They did this because economics was suffering at the time, and perhaps suffers acutely to this day, from physics envy<\/a>.<\/p>\n

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Economists would be between sociologists and biologists on this spectrum, and would wonder what on earth psychologists were doing on it at all.<\/figcaption><\/figure>\n

The core assumption of the model held that individuals are constantly optimizing a mathematically tractable utility function that converts things like the amount of goods consumed (good) or the amount of hours worked (bad) given constraints (income) into a nebulous concept known as \u201cutility<\/a>\u201d.<\/p>\n

Predicting behavior (and thus doing useful things like solving for market-clearing prices) was therefore a matter of applying optimization techniques from physics to the economic models. In short: take derivative, set equal to 0. (There really should be a funny comic about that, but I can\u2019t find one.) Presto! Human behavior reduced to calculus.<\/p>\n

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Figure 1: A comprehensive depiction of human nature.<\/figcaption><\/figure>\n

Except that of course that it doesn\u2019t <\/em>reduce to calculus, and quite a lot of criticism is leveled at economists for this reason. In truth, however, no one is more acutely aware than economists of the distinctions between the idealized model and flesh and blood humans. This key factor is the reason I believe the example is properly one of epistemic humility: economists recognize that their model is flawed. They know it\u2019s wrong. They neither deny the problems and assert the model’s literal truth, nor do they superficially accept the criticism while carrying on as though nothing had changed, thus rendering their tacit acknowledgment a de facto denial. The question, of course, is if they know the model is wrong why do they stick with it? Why do they pretend that a broken model works when it manifestly doesn\u2019t?<\/p>\n

The primary reason is that the alternative, while true, is technically useless. To say \u201chumans are irrational\u201d is not actually to solve any problem, but merely to give up and throw one\u2019s hands in the air. (Thus, we call into question the correspondence theory of truth<\/a>: Maybe the usefulness of a belief is more important than the degree to which it coincides with objective reality.)<\/p>\n

Which is not to say that the fundamentals of the model didn\u2019t change at all. The most important shift was subtle: modern mircoeconomic theory states that decisions are rationalizable rather than maintaining the rationality of the underlying cognitive processes. This move (e.g.toward\u00a0revealed<\/em> preference theory<\/a>) eschewed psychological explanations of human behavior for the objectivity of empirical observation. This neat replacement of the philosophical foundation of the model left it functionally unchanged: the economists got to keep using all their old tools and tricks, but they were not content to ignore the model\u2019s shortcomings.<\/p>\n

Instead, efforts to patch the model or address specific deviations of the model from real life have played a large role in the creation of a new sub-discipline: behavioral economics<\/a> (see also: neuroeconomics<\/a>). Here\u2019s a short list of new insights economists have derived as a result of trying to improve rather than abandon their models:<\/p>\n