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Physics Envy in Development (even worse than in Finance!)

Andrew Lo and Mark Mueller at MIT have a paper called “WARNING: Physics Envy May Be Hazardous to Your Wealth,” also available as a video.  The takeaway, which is equally relevant to Development as to Finance (the actual topic of the talk),  is that inability to recognize radical UNCERTAINTY is what leads to excessive confidence in mathematical models of reality, and then on to bad policy and prediction.

Imagine how much harder physics would be if electrons had feelings! (Richard Feynman)

The key concept of the paper is to define a continuum of uncertainty from the less radical to the more radical. You get into trouble when you think there is a higher level of certainty than there really is.

  1. Complete Certainty
  2. Risk without Uncertainty (randomness when you know the exact probability distribution)
  3. Fully Reducible Uncertainty (known set of outcomes, known model, and lots of data, fits assumptions for classical statistical techniques, so you can get arbitrarily close to Type 2).
  4. Partially Reducible Uncertainty (“model uncertainty”: “we are in a casino that may or may not be honest, and the rules tend to change from time to time without notice.”)
  5. Irreducible Uncertainty:  Complete Ignorance (consult a priest or astrologer)

Physics Envy in Development leads you to think you are in Type 2 or Type 3, when you are really in Type 4. This feeds the futile search for the Grand Unifying Theory of Development.

Type 4 “model uncertainty” seems even more likely in development than in finance, theory is a lot better developed and produces more precise hypotheses in the latter than in the former (but even I am not so skeptical to think that we are in Type 5 in development).

What to do about large uncertainty in development? Obviously not a question that can be answered in one sentence.  Maybe we can start by discussing social systems that allow decentralized agents to solve their own problems that feature less uncertainty, and doesn’t require any centralized agent to know the uncertain whole model of the whole system.

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11 Comments

  1. Rebecca Burlingame wrote:

    Per your last sentence: it wouldn’t hurt my feelings if “more uncertainty” was occasionally involved as well. By way of example, the frequent scenario where decisions by “the experts” get made for the villagers without really taking into account the villagers’ own ideas or suggestions. Guess who also fits into that same profile as well: today’s doctors. Seems a person doesn’t have to be poor to not be taken seriously.

    Posted October 28, 2010 at 9:20 pm | Permalink
  2. ewaffle wrote:

    Physicists have 3 laws the explain 99 percent of physical phenomena; economists have 99 laws that explain 3 percent of economic phenomena. (close paraphrase from Lo’s presentation)
    —————–
    Sounds about right.

    Posted October 28, 2010 at 9:43 pm | Permalink
  3. Denis Drew wrote:

    A BIT LONG — BUT IT JUST FITS — “psychology and economics all the way — :-)
    ******
    Winning Economics Issues for Dummies (meaning Democrats)

    Economists – males most appropriately – suffer physics envy. Economic interactions are convoluted by government formulae. Distorting their look at those wheels within wheels are mostly unheard of male pack instincts along the well understood cultural biases (we have been “domesticated” to live with us for 100s of millennia).

    Pack hunter midbrains channel groupthink – with a preference for on-the-spot doability: prey not tarrying while predators squabble. Wheels within wheels of groupthink: economic pros must in turn persuade mostly unknowing political and journalistic packs if they are actually going to cause any change. There seems walls within walls to innovation – to males.

    Living too remotely from the day-to-day interactions – no pitfall in organic chemistry – can fuzz out crucial ifs, ands and buts. Economists of all stripes (most are progressive) start every minimum wage dialogue with ye ole first week supply and demand chart and mostly end there – skip selling fewer units (or hours) for more dollars – miss that a raise that increases teen unemployment may have attracted more trainable adults (labor price was too low) – forever blind to the missing American-born workers behind Chicago fast food counters where the state minimum wage recently reached Eisenhower’s 1956 level, $8/hr – and even behind San Francisco counters where annual inflation adjustments will maintain the city minimum wage, at LBJ’s 1968 level, $10/hr. $7.25/hr ($5.50/hr!): fuggedaboutit!

    The first commandment of medical practitioners is making daily rounds to observe patients. Would it really take a “small army” of economists, as recently supposed, to plow enough data to explain income inequality (a wishy-washy phrase that sounds more like a shave than a haircut)? Or are everyday bad to worse American labor experiences enough to make the culprit perfectly plain: the almost total (but one-step undoable?) coast-to-coast blackout of labor bargaining power — and political sway.

    American unionized (!) labor hell: “Dr. Pepper Snapple Group made $555 million in profits last year. CEO Larry Young made $6.5 million but says Mott’s applesauce workers must take a $1.50 an hour pay cut” [see http://blog.aflcio.org/2010/09/07/motts-corporate-greed-rotten-to-the-core/: specific fit to this specific occasion – where is the missing legally mandated, sector-wide labor agreement to neutralize management’s squawking about “above market pay”? Minimum wage hell: now $2.75/hr below LBJ’s 1968 level, double the per capita income later: zero labor lobbying — and going down.

    The second commandment of medical practitioners is “studies show” — even when they can’t pinpoint all contributory factors. Studies show that only legally mandated, sector-wide labor agreements (instituted originally along with welfare guarantees to contain labor costs to more quickly rebuild postwar Europe) have been proven effective in preventing the race to the wage and benefit bottom — in decades of “trials” across first, second and third world labor markets.

    Under sector-wide all employees in the same geographic locale doing the same work — even for different employers – work under common collectively bargained contracts.

    Card-check legislation would be to re-unionizing America what the $2.75/hr short-of-1968 hike was to restoring the minimum wage (in the poorest section of America, a $15/hr minimum would raise the price of: housing, medicine, transportation, food, clothing – what?). Today’s median wage is $15/hr – a teeny-tiny $2.50/hr more than the 1968 median. There appears no wholesome economic reason why the median could not have doubled to $25/hr as average income doubled. Is “shanghaied” be a better fit than “inequality”?

    Will someone please shout out “sector-wide labor agreements” at their next crowded economic or political forum? They won’t cause a panicked stampede – except maybe from the outside-in. Supermarket workers and airline employees (for a start) are ready to kill (even vote) for mandatory sector-wide bargaining. 50 million voting age toilers out of 100 million say they want to be unionized – before any nationwide re-unionizing dialogue has even begun.

    Posted October 29, 2010 at 8:36 am | Permalink
  4. AndyB wrote:

    Bill, I couldn’t agree more with this post. I work in the field of peacebuilding and conflict resolution, a field more even more uncertain an nonlinear that development. But I would love you to discuss how this perspective is in synch with the types of grand summative evaluations you often advocate for. It seems like this perspective would call for a more continuous learning process, a la Quinn Patton’s developmental evaluation, as opposed to a grand evaluation that is supposed to change the perspective of the central planner.

    Posted October 29, 2010 at 9:17 am | Permalink
  5. Joy wrote:

    “To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.”
    -Friedrich August von Hayek

    Posted October 29, 2010 at 12:50 pm | Permalink
  6. William Easterly wrote:

    AndyB, there is some misunderstanding — I don’t advocate grand summative evaluations (& I’m curious why you think I do) and I denounce central planners in general. The kind of decentralized searching that is really what is needed certainly includes continuous learning. Best. Bill

    Posted October 29, 2010 at 1:11 pm | Permalink
  7. Don Stoll wrote:

    To the apt quotation from Richard Feynman, I would only add “if electrons had feelings that drove them sometimes to gratuitously violent collisions and sometimes to accelerating flight from each other which makes reuniting nearly impossible.”

    Okay, so my emendation sacrifices (or slaughters) the pithiness Feynman wanted—but at least it explains the uncertain course so far of a new women’s healthcare initiative in the Tanzanian village where I work. Many or most of the women agree on the need for such an initiative, especially the midwives who must deal with the consequences of genital cutting. However, we don’t know yet whether the key parties will succeed in working harmoniously with one another, or even consent to sit down in the same room. (Though it seems men have generated pretty much all of the problems I allude to, so, in the measure attention gets refocused on the fact that this is about the suffering of women, I have hope.)

    I therefore appreciate the post’s suggestion about “discussing social systems that allow decentralized agents to solve their own problems that feature less uncertainty, and doesn’t require any centralized agent to know the uncertain whole model of the whole system.” On one hand there’s nothing uncertain about the suffering at stake, and on the other hand I see no agent in the village capable of knowing the model of the relevant system—certainly not myself!

    Posted October 29, 2010 at 1:40 pm | Permalink
  8. Manuel wrote:

    Ehem, I knew your “fat cats bet on fat tails” was tongue-in-cheek. Income distribution is also in Type 4.

    Posted October 29, 2010 at 3:18 pm | Permalink
  9. @Denis Drew – Awesome “fit” and a great read to boot! It really makes you stop and think for a moment doesn’t it?

    Posted October 30, 2010 at 2:27 am | Permalink
  10. Fantastic.

    Can I cross-post this to the Aid on the Edge of Chaos website, which focuses on the implications of complexity science for international aid?

    Ben

    Posted November 3, 2010 at 6:18 pm | Permalink
  11. Fantastic. Can I cross-post this to my blog, which focuses on the implications of complexity sciences for international aid?

    Ben

    Posted November 3, 2010 at 6:23 pm | Permalink

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