The real question is “what else do you have to make decisions with?” Your intuition is a model. Brainstorming then picking the best-sounding is a model. Strict application of rules is a model. Some are more legible than others, and some are more powerful at handling out-of-domain questions. Some, importantly, SEEM more powerful BECAUSE they’re illegible, and you can’t tell how bad they are. One very strong mechanism for improving them is to quantify. Even if you know it’s not precise, it adds a lot of analytical power to testing the plausibility of the results before committing a lot of resources and seeing what actually happens.
It’s provably wrong to believe that any formal model is complete and consistent. But it’s even more wrong to throw out modeling methodologies for making many, perhaps most, decisions.
A few examples of topics where you really don’t include any cost/benefit estimates in your decision (as opposed to strawman examples of INCORRECT cost/benefit use) would go a long way.
Sure, you can use a broad definition of “model” to include any decision making process. But I used the word model to refer to probabilistic and quantitative models.
A few examples of topics where you really don’t include any cost/benefit estimates in your decision (as opposed to strawman examples of INCORRECT cost/benefit use) would go a long way.
Sure. An example from my life is “I refrain from investing in the stock market because we do not understand how it works and it is too uncertain”. I don’t rely on cost benefit analysis in this case. It is more of qualitative analysis. I do not use cost benefit analysis because I am unable to quantify the expected utility I would derive from investing in the stock market. I do not have the necessary information to compute it.
While I agree that the Efficient Market Hypothesis basically means you shouldn’t pick stocks, indexes like the S&P 500 are pretty good to invest in due to you getting the risk-free rate. That’s usually around 7% long term. Focus on long-term growth, and don’t time the market. You can invest, as long as you are willing to focus on decades of holding a index.
I know about index funds. Even those are not nearly as safe as people think. It is a fallacy to assume that because the SP500 on average grows 7% a year that you will get a 7%/year return rate on your investment. Your true expected return is lower than that. People have a hard time predicting how they will behave in particular situations. They swear they won’t sell after a crash, and yet they do. You might say you are not like that, but probabilistically speaking you probably are. You might get sick and need to get cash quick and sell while the market is down. You might need to buy a house because of an unexpected child. Because the group gets 7% return, does not mean that an individual will get 7% return on the long run. This is called the ergodicity fallacy. There is also tracking error and fees, depending on your broker.
I think you haven’t really responded to Dagon’s key point here:
“what else do you have to make decisions with?”
You express concern about Caplan underestimating the importance of climate change. What if I think the risk of the Large Hadron Collider collapsing the false vacuum is a much bigger deal, and that any resources currently going to reduce or mitigate climate change should instead go to preventing false vacuum collapse. Both concerns have lots of unknown unknowns. On what grounds would you convince me—or a decisionmaker controlling large amounts of money—to focus on climate change instead? Presumably you think the likelihood of catastrophic climate change is higher—on what basis?
Probabilistic models may get weaker as we move toward deeper uncertainty, but they’re what we’ve got, and we’ve got to choose how to direct resources somehow. Even under level 3 uncertainty, we don’t always have the luxury of seeing a course of action that would be better in all scenarios (eg I think we clearly don’t in my example—if we’re in the climate-change-is-higher-risk scenario, we should put most resources toward that; if we’re in the vacuum-collapse-is-higher-risk scenario, we should put our resources there instead.
“All models are wrong, but some are useful. ”
The real question is “what else do you have to make decisions with?” Your intuition is a model. Brainstorming then picking the best-sounding is a model. Strict application of rules is a model. Some are more legible than others, and some are more powerful at handling out-of-domain questions. Some, importantly, SEEM more powerful BECAUSE they’re illegible, and you can’t tell how bad they are. One very strong mechanism for improving them is to quantify. Even if you know it’s not precise, it adds a lot of analytical power to testing the plausibility of the results before committing a lot of resources and seeing what actually happens.
It’s provably wrong to believe that any formal model is complete and consistent. But it’s even more wrong to throw out modeling methodologies for making many, perhaps most, decisions.
A few examples of topics where you really don’t include any cost/benefit estimates in your decision (as opposed to strawman examples of INCORRECT cost/benefit use) would go a long way.
Sure, you can use a broad definition of “model” to include any decision making process. But I used the word model to refer to probabilistic and quantitative models.
Sure. An example from my life is “I refrain from investing in the stock market because we do not understand how it works and it is too uncertain”. I don’t rely on cost benefit analysis in this case. It is more of qualitative analysis. I do not use cost benefit analysis because I am unable to quantify the expected utility I would derive from investing in the stock market. I do not have the necessary information to compute it.
While I agree that the Efficient Market Hypothesis basically means you shouldn’t pick stocks, indexes like the S&P 500 are pretty good to invest in due to you getting the risk-free rate. That’s usually around 7% long term. Focus on long-term growth, and don’t time the market. You can invest, as long as you are willing to focus on decades of holding a index.
I know about index funds. Even those are not nearly as safe as people think. It is a fallacy to assume that because the SP500 on average grows 7% a year that you will get a 7%/year return rate on your investment. Your true expected return is lower than that. People have a hard time predicting how they will behave in particular situations. They swear they won’t sell after a crash, and yet they do. You might say you are not like that, but probabilistically speaking you probably are. You might get sick and need to get cash quick and sell while the market is down. You might need to buy a house because of an unexpected child. Because the group gets 7% return, does not mean that an individual will get 7% return on the long run. This is called the ergodicity fallacy. There is also tracking error and fees, depending on your broker.
I think you haven’t really responded to Dagon’s key point here:
You express concern about Caplan underestimating the importance of climate change. What if I think the risk of the Large Hadron Collider collapsing the false vacuum is a much bigger deal, and that any resources currently going to reduce or mitigate climate change should instead go to preventing false vacuum collapse. Both concerns have lots of unknown unknowns. On what grounds would you convince me—or a decisionmaker controlling large amounts of money—to focus on climate change instead? Presumably you think the likelihood of catastrophic climate change is higher—on what basis?
Probabilistic models may get weaker as we move toward deeper uncertainty, but they’re what we’ve got, and we’ve got to choose how to direct resources somehow. Even under level 3 uncertainty, we don’t always have the luxury of seeing a course of action that would be better in all scenarios (eg I think we clearly don’t in my example—if we’re in the climate-change-is-higher-risk scenario, we should put most resources toward that; if we’re in the vacuum-collapse-is-higher-risk scenario, we should put our resources there instead.