Category Archives: Economic education and methods

Clarification: the null hypothesis

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A reader asked for this.

The term “null hypothesis” comes from statistics. The word “null” means “no effect” and the null hypothesis is that an intervention has no effect on the outcome. If you were testing the effectiveness of a drug, the null hypothesis would be that the drug works no better than a placebo. If you do a study and you do find that the drug works better than the placebo, and this is not likely just an accident, then you reject the null hypothesis.

I apply the term “null hypothesis” in the context of education. My observation is that most of the time when an intervention in education is evaluated rigorously, it has no effect compared to a control group, or the effect wears out over time, or the effect cannot be duplicate in repeated experiments or at large scale.

Is personality psychology just a baloney sandwich?

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I say no, although it is not like physics. We are talking about modest correlations, not strict laws.

What made the marshmallow test famous was the follow-up work which suggested that a child’s ability to defer gratification on the test helped predict future outcomes, such as SAT scores. These correlations with longer-term outcomes speak to the usefulness of the test in revealing some important trait.

Road to Sociology Watch

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Regarding a code of conduct promulgated for the American Economic Association, women in economics at Berkeley write,

In order to craft an effective and appropriate Code of Conduct, the AEA must commit to a longer process that enlists and compensates a diverse group of economists to draft a robust document with a set of tangible commitments to improving conduct in our profession. We expect the group of economists crafting this document to include women, people of color, LGBTQ economists and those from a diverse set of socioeconomic, religious, national and intellectual backgrounds. These economists should be compensated financially for drafting a complete and thorough Code of Conduct that outlines concrete types of behavior that are deemed unacceptable and that institutionalizes a process through which violations can be reported and addressed.

…Professions such as sociology and law have modeled the type of robust code of conduct that a profession such as economics could adopt.

Within twenty years, economics will have all of the ideological diversity of sociology and law.

Models, Marx, and Mises

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Recently, I have made the case for updating economics in an essay and in this podcast with Russ Roberts. As I expected, I encountered resistance from three sources: people who think in terms of models; people who think in terms of Marxist sociology; and people who think in terms of Mises.

Somebody on twitter threw the Diamond-Dybvig model against my claim that economists do not understand modern finance. I get this a lot. People hold up that model and say, “See? We understand the financial crisis! We understand the financial crisis!”

I happen to know the paper, which shows that we can have a bank run in a mathematical model. It’s better than a model that does not allow bank runs. But apart from that, I don’t think that gives them much insight into how financial markets operate nowadays. (I actually prefer another Douglas Diamond paper, on financial intermediation as delegated monitoring.) I happen to think that one needs to understand phenomena related to housing, mortgage originations, capital regulations, mortgage-backed securities, CDO’s credit rating agencies, credit default swaps, repurchase agreements, and other components of modern reality. I say “stare at the world, not at your model,” and they say “stare at Diamond-Dybvig.” We have no common ground.

Other commenters say that everything one needs to know is in Mises. Regarding Mises, there seems to be no middle ground. His detractors under-rate him. His fans over-rate him. I don’t see him as having anticipated the issue of asymptotically free goods, just to take one example.

Finally, you get the folks who say that I am correct to stress the importance of culture in affecting economic behavior and who proceed to claim that this shows that Marxist theories of power explain everything. They don’t.

Russ Roberts and me

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A podcast on Economics for the 21st century. An excerpt:

And I think–I listed, in the essay, four key research areas. And one of them is what I call Firm Interaction. And this question of how the ecosystem operates now, in these various industries, is a really important question. As is what the traditional boundaries of the firm question: what should be done inside the firm and outside the firm? I mean, I’m shocked at the breadth of Amazon. I mean, it’s incredible, the breadth of that firm. I don’t think any theory of the firm that economists–economists haven’t done much with their theories of the firm, because again it becomes an intangible issue of, you know, what should you do inside the firm and outside the firm. It all depends on intangible things, and economists don’t do well with intangible things. But, I don’t think anybody, from Coase, or Williamson, or anyone who has looked at that would have told you that something with the breadth of Amazon would have emerged.

I was referring to this essay.

Subjective well-being

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Angus Deaton writes,

The measure I use is an evaluative measure of well-being that asks people to report, on an eleven-point scale, from 0 to 10, how their life is going. The question is originally due to Cantril (1965), and is asked in exactly the same way of all individuals sampled by Gallup in their World Poll. The question is “Please imagine a ladder, with steps numbered from 0 at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally stand at this time?” There is no mention of happiness, so the ladder is explicitly not a hedonic measure that enquires into momentary mood or feelings. Rather it asks people to assess how their life is going “at this time,” an answer to which requires cognitive effort by the respondent, and which is a more considered assessment of well-being than trying to weight together or average the host of emotions and feelings that make up the evanescent texture of everyday life. In the surveys I use here, the Cantril ladder question is immediately followed by a question identical to the ladder question but with the last sentence replace by, “Just your best guess, on which step do you think you will stand in the future, say about five years from now?” I shall use this question too.

I think that as intangible goods and services become increasingly important, economists are going to have to resort to subjective measures. This means that, like Deaton, we will have to think carefully about how we take those measurements.

Me vs. Nassim Taleb

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As Tyler Cowen noted, Taleb takes on some of his reviewers. In a comment, I took on Taleb when he wrote

the variance within forecasters is smaller than that between forecasts and out of sample realizations.

He saw it as a sign of forecasters copying other forecasters. I do not think that this is necessary as an explanation. Unless you are adding noise to your forecast, your forecast should always have less variance than what you are trying to forecast. And it would not surprise me to see a range of forecasts show less variance than the range of subsequent outcomes. I wrote,

That is what you could expect. Suppose that the variable you are trying to forecast, Y, has a set of known determinants, X’s, and a set of random determinants, e’s. People should forecast conditional on the X’s, and the range of forecasts should be narrow. But the range of outcomes relative to forecasts depends on the e’s, and so the out of sample realizations could (and often should) have a wider variance

As usual, in your comments, please avoid making generalizations about either Taleb or me. Speak only to the specific issue that I raised.

Road to Sociology Watch

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From The Economist

A similar study of American economists by Ms May and others also found men more sceptical of government regulation, more comfortable with drilling in the Arctic National Wildlife Refuge, and more likely to believe that a higher minimum wage would cause unemployment. Women were 14 percentage points less likely to agree that Walmart generates net benefits, and 30 points more likely to agree that American openness to trade should be tied to higher labour standards abroad.

Pointer from Tyler Cowen. One of the factors that will cause economics to move left will be efforts to bring more women into the profession. This development will be praised in most quarters.

Jason Collins on Grit

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He writes,

I will say that Duckworth appears to be one of the most open recipients of criticism in academia that I have come across. She readily concedes good arguments, and appears caught between her knowledge of the limitations of the research and the need to write or speak in a strong enough manner to sell a book or make a TED talk.

. . .But Duckworth does not address the typical problem of studies in this domain – they all ignore biology. Do the students receive higher grades because their parents are more demanding, or because they are the genetic descendants of two demanding people? Are they world-class performers because their parents model a work ethic, or because they have inherited a work ethic? Are they consistent with their extracurricular activities because their parents consistently keep them at it, or because they are the type of people likely to be consistent?

He points out that “grit” is mostly conscientiousness. The case that conscientiousness matters is sound. I do think there are some studies that show that conscientiousness can be coached, but I am not confident that it is settled science.

My essay on why economics does not progress

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In Economists Wake Up: It’s the 21st Century, I write,

Along the Akerselva River in Oslo Norway, the buildings of the industrial era have been re-purposed or replaced. The same is true in Pittsburgh, Pennsylvania or Birmingham, England. But economists still inhabit the world of the 19th century, in which hordes of interchangeable workers in stark factories toil in the service of the owners of capital.

Read the whole thing, along with today’s other blog post.