Tag Archives: Economics

Bayesian rationality — nothing but a probabilistic version of irrationalism The initial choice of a prior probability distribution is not regulated in any way. The probabilities, called subjective or personal probabilities, reflect personal degrees of belief. From a Bayesian philosopher’s point of view, any prior distribution is as good as any other. Of course, from a Bayesian decision maker’s point of view, his own beliefs, as expressed in his prior...

Over at Bloomberg View, Noah Smith has a pop at what he calls “heterodox economics”. By this he means the new ideas in economic thinking that have sprung up since the 2008 financial crisis but so far haven’t made it into mainstream economic journals.Noah starts by admitting that mainstream economics abjectly failed to predict the crisis and gave little or no guidance on how to deal with it. Because of this, according to Noah, “many people have looked around for an alternative paradigm --...

The Keynes-Ramsey-Savage debate on probability Neoclassical economics nowadays usually assumes that agents that have to make choices under conditions of uncertainty behave according to Bayesian rules, axiomatized by Ramsey (1931) and Savage (1954) – that is, they maximize expected utility with respect to some subjective probability measure that is continually updated according to Bayes theorem. If not, they are supposed to be irrational, and ultimately –...

In a previous video, my class went over the empirical setup in one of the main papers about the disposition effect in stock-market behavior. Now they got to talk about the results of that analysis. If you need a refresher, you can see the whole behavioral economics playlist here.

On the irrelevance of Milton Friedman In producing theories couched in terms of isolated atoms that are quite at odds with social reality, modellers are actually compelled to make substantive claims that are wildly unrealistic. And because social reality does not conform to systems of isolated atoms, there is no guarantee that event regularities of the sort pursued will occur. Indeed, they are found not to … Friedman enters this scene arguing that all we...

You know you’re an econ/math nerd if you read this and think “haha, it’s like the matching pennies game.” But hear me out…here’s the matching pennies game, and, like the joke, the crux of the game is that there is no Nash equilibrium without randomization. To further the analogy: The matching pennies game works as it does because player 1, let’s say, “gets off” when the pennies match whereas player 2 gets off when the pennies don’t match. (This wording hopefully shows the intuition of why...

To understand New Classical thinking about this crucial issue, consider Lucas’s response to the following question: If people know the true distribution of future outcomes, why are autocorrelated mistakes such a common occurrence? “If you were studying the demand for umbrellas as an economist, you’d get rainfall data by cities, and you wouldn’t hesitate for two seconds to assume that everyone living in London knows how much it rains there. That would be assumption number one....

In my class, I try to introduce a topic and then give my students a discussion question to work through so I can make sure that everyone is catching on. This discussion question relates back to the disposition effect, or the bias towards selling winning stocks and away from losing stocks. If you need a refresher, you can see the entire behavioral economics playlist here.

Reasons to dislike DSGE models There are many reasons to dislike current DSGE models. First: They are based on unappealing assumptions. Not just simplifying assumptions, as any model must, but assumptions profoundly at odds with what we know about consumers and firms … Second: Their standard method of estimation, which is a mix of calibration and Bayesian estimation, is unconvincing … Third: While the models can formally be used for norma- tive purposes,...

Keynesian economics in a nutshell