Iconoclast.

Alright, first off what the fuck is a "DSGE" model?

The "D" stands for dynamic, meaning that it moves across multiple time periods. The "S" stands for stochastic, which means that some components are random, or unpredictable. The "G" stands for general (as opposed to partial), which means that it covers the entirety of an economy. The "E" stands for equilibrium, or essentially solutions to the model (A rock rolls down a hill and then rests at the bottom. This is an "equilibrium" point for the rock.)

Together that makes "Dynamic Stochastic General Equilibrium" models. They're about what you'd expect. Models of the economy that take into account everything I just mentioned. Different times periods, random shocks, and so on.

Certainly, as I've stated before, models are incredibly helpful when they're used to understand complex relationships in an economy. Not only that, but you can use them to make predictions about things that haven't happened yet. As well as other benefits, such as having a framework to understand policy with, etc.

Well, what's so bad about that? The problem isn't with DSGE models, per se, but theoretical modelling of economies in general. For example, models are exactly what you put into them. I mean, all you need are basic assumptions that make the internal organs of your model logically consistent, and then you're done. You certainly have to conform it to basic empirical data, but for the most part even if it doesn't no one will notice, since most models leave out many complicating factors (they're usually abstract representations that only measure very strict scenarios), and most empirical evidence isn't strong enough to completely falsify a model. So the more complex models with very subtle predictions will cling tenaciously to life.

Part of this is a problem due to empirical methods not being reliable enough to falsify hypotheses, part is inherent problems with assumptions and simplifications, part is because this shit is hard.

The point, however, is that there's a problem. As Sims pointed out in the last post, though, there are redeeming qualities, even if there are problems. Some models do have the ability to predict. We just need to get the right assumptions and complicate the model a bit to make it more realistic. The point is that as of right now we just need to get the theory right before we can use it for policy, and before we get the theory right we have to validate it with good econometric work.

Now, that's all I wanted to say here, but this is Harald Uhlig at the same conference defending (a bit more ingenuously) DSGE models:

"You know, physicists dream of a theory of everything...it's pretty pathetic...certainly doesn't help us understand the financial crisis."

I also really enjoyed his comparison of abstract art with abstract theory, although I don't think that aesthetically pleasing art and aesthetically pleasing theory are the same. One has the purpose of being beautiful, while the other has the purpose of predicting and understanding. Unless the point of modelling is so that we can make cool models. I'm down, but it seems a little inefficient. So
I hope "beautiful", with regards to economic models, means something else.

Long time no see.

So anyways I'm hoping to pick this up again to keep me humble. The problem is that sometimes I go overboard and a simple blog post becomes a book, which is way too cumbersome and demanding on my part. I'll keep it short and sweet from now on.

Just so that I don't keep it that short, I might as well say something about something. So, here goes.

The guy who has influenced my thinking more than anybody else within the past couple of years would definitely be Chris Sims. The sad part is that I didn't know him at all before he won his Nobel. He's more of a monetary macroeconomist, which is nowhere near where I am (his empirical methods much closer). Still, after checking into his work I picked up a couple gems regarding economics, science, methodology, and so on.

Here's him at a conference:

"At central bank conferences I often play the role of DSGE iconoclast...however, in this conference criticizing DSGEs is a cheap audience pleaser. Not an iconoclasm. And, my instincts are iconoclastic, so what I'm going to do now is defend DSGEs."

Have to like this guy. Anyways, I'll make sure to comment on some points he brings up here, as well as my general opinions regarding modelling and empirical evidence. In the meantime, homework.

If you read this post, then you will understand basic logic.

I want to talk about a strange math related topic.

The moment anyone starts seriously studying mathematics they immediately come across a few terms (all related to logic) that are very related. I specifically picked them because they are very applicable in even every day logic. They are:

1) Sufficiency and necessity.
2) logical implications (i.e. ⇒, ⇔, iff, etc.)

I'll start with the first.

Now, the first time someone studying mathematics comes across this is probably in mathematical optimization (necessary and sufficient conditions for maximization and minimization). Yet, it springs up constantly from there on. What does it mean?

Well, I'll start with an example.

Let's say that I want to prove that I'm a human being. Showing that I have blood is necessary, since human beings have blood, but not sufficient. Many different creatures have blood. Likewise, let's say that I want to prove I'm a male. Since my name is Brandon, that's sufficient, but not necessary in order to prove it. Certainly, there are many men who aren't named Brandon, but if you're named Brandon you're most certainly a male.

The distinction is very important. In these examples something that is necessary is exactly that, necessary, but that doesn't mean it completes the proof. Sufficiency, on the other hand, can prove it, but that doesn't mean it's necessary, since there may be examples where it's true that aren't related to it.

However, they can be taken together, and that's when it's the strongest. Let's say all males were named Brandon, and only males were named Brandon (no dogs, creatures, women, etc.). Well, showing that my name is Brandon is both necessary AND sufficient since it's sufficient to prove I'm a male, but at the same time for me to prove it it's necessary that my name is Brandon.

 This leads right to logical implication which is directly tied to this (and makes it much more intuitive). The first time you come across these would be in mathematical logic, which may be in early calculus, or as late as real analysis.

Here are the implication arrows. They are:

P⇒Q
Q⇒P
P⇔Q
 
Although the first two seem redundant, I'll use them with my previous examples. Let's say the statement P is "My name is Brandon" and Q is "I'm a male". The first says, essentially, "If my name is Brandon, then I'm a male." Which means the fact that my name is Brandon implies I'm a male. Let's switch the world around a bit, and say that all males are named Brandon, but so are some females. Then, the reverse statement would be true. "If I'm a male, then my name is Brandon", but then the previous statement would no longer be true since some females would be named Brandon. So now being named Brandon isn't enough to prove I'm male.

Notice how this works. With the first two implication arrows, you can take the previous statement and imply the latter, but you can't go back. My name is Brandon, therefore I'm a  male. However, if I'm a male that doesn't mean you can show my name is Brandon, since it's certainly not always true.

The last example follows necessity and sufficiency. I'll just restate my example of both necessity and sufficiency (the world where all men are named Brandon, and everyone named Brandon is a male), which is "If my name is Brandon, then I'm a male", and "If I'm a male, then my name is Brandon." In other words, I could take either fact and it would lead me to the other.

This is very simple, but incredibly powerful with logic. My name is Brandon⇒I'm a male. I'm a human being⇒I have blood. I'm from planet Earth⇔I'm from the third planet from the sun.

The first leads me to the second in all of those, but only in the last one can I go both directions.


Strange topic. Feels weird. I'll try something different next time.

I feel your pain, Appleby.

Taken (stolen?) from "Catch-22"

"Appleby was as good at shooting crap as he was at playing Ping-Pong, and he was as good at playing Ping-Pong as he was at everything else. Everything Appleby did, he did well. Appleby was a fair-haired boy from Iowa who believed in God, Motherhood, and the American Way of Life, without ever thinking about any of them, and everybody who knew him liked him.

'I hate that son of a bitch,' Yossarian growled."


I feel an urge to read that book again. Why does he bring up ping-pong? Who cares.

Update: I think it's a state law in Iowa now that you need to post this video every time you mention Iowa.

They run these advertisements all the time in the United States..

Here's some ideas to get the ball rolling in Britain. With slogans like "We hate ourselves-we'll probably hate you too", "Grey Britain", and "Go to Australia instead", how can they lose?

Thank God these aren't actual, prospective, advertisements. Just jokes. The idea isn't a joke, though.

I make Kleptomania look good.

One person gets this joke.

Alright, stealing one more from Beth, but it'll be quick.

 Unlike her usual self, she's brought up two stealworthy posts in a row. This time, She's brought up charity as a topic, and mentions some facts regarding popular charities. She brings up a great point:

 "With so many charities out there, if you're thinking of making a donation, it's important to know how to choose the right one."

I couldn't agree more with this. This is nearly the most important factor of picking charities, and most blatantly ignore it. In the United States it's very popular to text in a donation that bills your phone company. There's literally no information on how it'll be spent, where exactly, or how efficient it is. This is exactly what she's talking about.

However, I do disagree with one point she brings up later:

"For a charity to be considered as one that spends it's money well, two thirds, or 66.6% of donations should go directly towards programmes supporting the charities aims."

It's a very good indicator, but to bring up an analogy where it might not always work would be  educational spending. Many sources claim increases in educational spending as something desirable in and of themselves, but as professor Heckman would put it, spending is an input, not an output. So, I agree absolutely that we need to spend time and choose, but now it has become considerably more complex on how we choose.

If two charities, A and B, make $100,000 each, but A spends 10% on administration costs, and firm B spends 30%, then, superficially, it appears that firm A has more "bang for the buck". After all, 90,000 goes to the stated cause for A, but only 70,000 for B.

However, let's say B is more efficient than A. Let's say that, out of the money that goes, 1/4th of A's is spent efficiently, but firm B spends 3/4ths of it's money efficiently. Some examples would be that A spends more money on things that aren't used, or perhaps it spends it on projects that are relatively less helpful than B.

Well, now multiplying the money they have to the percentage of it that's used effectively, we get A has $22,500 going to the charity, and firm B has $52,500. The roles have reversed.

How do we know which charities are efficient? Well, I've heard of some estimates that mix Beth's definition with other efficiency measures, like this. If you want more rigorous studies I've heard of a whole slew of research coming from John List over at Chicago. Since I haven't gone over that, I'll cover one paper of his that I have, which is this. One part of the Abstract runs:

"We design a door-to-door fund-raiser
in which some households are informed about the exact time of solicitation with a
flyer on their doorknobs. Thus, they can seek or avoid the fund-raiser. We find
that the flyer reduces the share of households opening the door by 9% to 25%
and, if the flyer allows checking a Do Not Disturb box, reduces giving by 28%
to 42%. The latter decrease is concentrated among donations smaller than $10.
These findings suggest that social pressure is an important determinant of door-to-
door giving."

So, apparently part of the reason we give is social pressure. Could be pressured into doing worse things, I suppose.

Now I'll stop stealing for a while and be original.

Approaching light speed.

Over a hundred views? 3 different countries? 2 of which aren't my own? I'm worldwide mother fuckers.


Time to celebrate:

Enjoy the storm.