"Irrational Everything"

A great piece was done by Guy Rolnik, the highly educated editor of Haaretz, on why economists use models if they don't work. As I've pursued my undergrad and graduate education in economics, I have been harassed, or at the very least agressively questioned, on why economists forecast the economy with models that can't even match the current trends. My default reply is simply that our job is not to change the economy, but simply understand it in its most basic form.

Today when I read Rolnik's interview of Professor Kahneman, the logic of modeling finally came to me. Kahneman relates the economy to the weather system - it's irratic, hard to forecast, but people still put their faith in the weather report.

I liken what is happening now to a system that forecasts the weather, and does so very well. People know when to take an umbrella when they leave the house, or when it will snow. Except what? The system can't predict hurricanes. Do we use the system anyway, or throw it out? It turns out they'll use it."

Okay, so they use it. But why don't they buy hurricane insurance?

"The question is, how much will the hurricane insurance cost? Since you can't predict these events, you would have to take out insurance against many things.

This brings us back to Law and Economics. The cost of precaution to guard against any possible negative outcome is prohibitively high and so we don't. It's like instead of carrying an umbrella on a 100 degree day, we take a chance that the weather report was right since the inconvenience of carrying the umbrella outweighs any expected benefits.

I'm glad I spotted this peice because even in a time where macroeconomics is falling apart, I need to have some assurance that what I'm studying is worthwhile.

Read the full article here!