Fortune Telling

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Most of us are shrink wrapped in our own ideology. Some of us more so than others.

I’m certainly very, very, ideological.

I come from a long line of secular Jews. My great grandparents and grandparents fled countries where they weren’t welcome. They were underdogs. They stuck out like sore thumbs. They were beaten by Cossacks and literally threatened with genocide by cruel nationalist majorities.

And probably because of this heritage I was bathed from a young age in the ideology of liberalism. In the idea that the weak had to be protected from the strong. That justice was something to be fought for, never granted. That the powerful and wealthy, left unchecked, would always move to consolidate and protect their own entitlements to the detriment of the have-nots. And that rational laws and government could serve as a bulwark against this predation.

From a young age teachers told my parents that they were convinced I would become a lawyer or a judge. So obsessed was I with justice and fairness.

And obviously I’m painting myself in the best possible light here. (Another irrational bias.)

But that’s neither here nor there.

The point that I’m getting to is that most of us have strong biases. And we are unconciously searching for data points that reinforce our own preconceptions. Be they liberal, conservative, religious, secular, artistic, or rebellious.

It’s this instinct that makes us more likely to group together with people of like mind. To irrationally become tribal and blind to reality. To close ourselves off to new ways of looking at the world.

But sometimes we become involved in debates. And we talk to those who just think oppositely from us. And it’s as if we speak two different languages.

How then can we resolve these disputes? How can we rationally see past our own ideological lenses?

Well one way that makes sense to me, is to look at the ability of varying hypotheses to predict outcomes.

A (convenient) example:

The 2012 presidential election.

Leading up to the election there was a vast amount of polling data. Polls of all stripes showed a small but persistent edge to Obama in most of the battle ground states.

Sabermetrically inclined statisticians like Nate Silver aggregated all of the available data and weighted it based on prior poll accuracy, and sample size, and came to the conclusion that Obama was going to win with almost 80% certainty.

But if you were to tune into FOXNews, and listen to Karl Rove, or if you were to read the Washington Examiner, and Michael Barone, you would’ve been presented with quite a different model. One which basically said that all of the polling was misweighted and that mitt Romney was going to win the election by a healthy margin.

And before the election two reasonably intelligent partisans could argue until they were blue in the face about whose model was right. And neither side would budge an inch.

But then there was an election. There was a result. There was reality.

And the obvious conclusion was that one model was more correct, and one model was less correct.

Parenthetically, one of the most enjoyable parts of election evening (for this vindictive liberal) was watching Karl Rove meltdown live on FOXnews as he argued that reality was conspiring against him.

 originalIt never gets old

And the reason why this is important, is that there’s going to be another election. And one model was more predictive than the other model. And so, if the next Mitt Romney goes out and his pollsters skew his polls towards an inaccurately nostalgic vision of the electorate, then his side will be doomed to repeat the same mistakes over and over again. And they won’t progress.

There it is; prediction, separating the wheat from the chaff.

How about a nonpolitical conflict?

How about the age old clash of creationism versus the theory of evolution? This is a particularly frustrating argument to get into from either perspective, because the assumptions are just so different for each of the parties. Communication is next to impossible.

And let’s face it, on some level it is a matter of faith. Most of us have not directly experienced evolution, or creation. But this debate has been going on for hundreds of years now.

And the scoreboard could not be clearer. The theory of evolution has been useful. It has given us endless insight into the behavior of biological systems. It has given us life-saving breakthroughs into areas such as chemotherapy resistance, and antibiotic resistance. And robust evidence of genetic evolution was predicted and has been proven to exist in our nuclei, enscripted in the Nucleotide pairs that encode the genes that no one even knew existed at the time Darwin conceived of the theory of evolution.

What useful discoveries has The theory of creation given us? What technology has been developed? What prediction has been foretold?  (Note: I am not arguing that the story of creation has no value, here,  just no predictive value)

What biblical technology, for that matter, do creationists use to broadcast their theory over the airwaves?


Flagship station of the Creationist Broadcasting Network?

There it is; prediction, separating the useful from the dogmatic.

A final example, and one that you can both talk about at the dinner table, and that is actually relevant to this blog.

The debate over whether active or passive investing is a better strategy has been going on since John Bogle invented the first index fund.

And interestingly before Bogle invented the first index fund, he wrote an award winning academic article arguing that active investing was superior.

And convincing arguments can be made on either side before there is data.

But the debate is old enough now. The data is in. And it almost always looks like this.


If you invest passively you will beat 60 to 70% of your risk matched active competition. And even if you’re lucky enough to bet on an active strategy and win relative to the passive competition, you will not be paid commensurate with the risk you took of losing, and you will be more likely to lose in the future.

So passive investors have not only made a prediction, they have bet on it! And year in and year out they have won.

(And won in proportion to the additional cost that active investing incurred.)

So there you have it: prediction, separating the fool from his money.

As an aside, I do realize that all three arguments support my own baseline prejudices.

And I know that there are plenty of examples that do not shine so favorably upon my perspective. (That I chose these is merely evidence of my own myopia.)

Feel free then, to share with me some examples of where my side was wrong (The inflation of the 70s comes to mind vis-à-vis Keynesianism), that I lack the intellectual honesty to see for myself.

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16 Responses to “Fortune Telling”

  1. Robert February 25, 2014 at 10:14 am #

    At least you admit you are very ideological and have biases (as indeed we all do). But whatever happened to your childhood sense of fairness? What liberal principle is honored by having ideological enemies instead of trying to see the world through their eyes, “walking in their shoes” for a moment? What ideological satisfaction is derived from picking the weakest arguments of your ideological “enemies” and then defeating them, rather than examining their strongest arguments–or at the very least, trying to understand why they may cling to weak arguments? Until you get behind the “why” of your opponents’ arguments, I don’t think you are being truly just or fair. (And in saying these things, I’m probably not being just or fair to you!). And finally, what does it prove when you conflate the practices and beliefs of particular adherents or proponents of a theory/model with the theory/model itself?

    A few examples, including reference to an earlier thread:
    Arguing that Austrian economics is bogus because some self-proclaimed Austrian economics adherents have predicted hyper-inflation. Ask: (a) is it right to judge an economic theory based on TIMING in a complex world with government intervention, when the theory isn’t about timing in the first place? (b) are those predicting HYPER-inflation (vs. inflation) making those predictions based on Austrian economics, or something else? (c) Who are the true Austrian economists, who developed the theory, and what did THEY actually say and WHY? (d) What contributions from the Austrian economists/philosophers are accepted as mainstream today?

    Arguing (as a vindictive liberal) that Rove had a bad model or that Republicans had their heads in the sand ignores important questions. Did Republicans really believe they were going to win the 2012 presidential election, or were they “talking their book”, trying to get their base to go to the polls? Was Romney a flawed candidate from the perspective of Republican conservatives (especially due to Romneycare), and perhaps does this explain the efforts of Rove/Fox/etc. to drive them to the polls? Why have Republicans lost the past two presidential elections–is it because they are stupid (clinging to flawed models), or is it because there is an ideological struggle going on within the party over whether it is more important to win elections by poll-tested issues or by sticking to conservative principles? Is one party responsible for “issue politics” or are both parties equally guilty? Does either party care about finding common ground to resolve important national problems, or are both parties exploiting wedge issues to gain power? Who benefits from this power, when Republicans are in power, or when Democrats are in power? (follow the money)

    Arguing against creationists on the basis of the predictive power of evolutionary models ignores important questions. Why do creationists exist? How did they evolve(!)? What drove the creation of Christian fundamentalism in the late 1800’s in the U.S. (the milieu within which Creationism arose)? Are creationists stupid, or are they fearful of losing something important, and what is that, and why are they fearful? Are some of those fears founded in reality? How did the “predictions” theory of evolution play out for the Jewish people in Germany, or for that matter, in the eugenics movement in the U.S.? Does it make sense to arrogantly attack Creationists, or does it make more sense to understand why they believe what they believe, and then try to address those root arguments, beliefs and fears?

    Deviating for a moment, consider your own profession. Why does lone atrial fibrillation (LAF) occur? Do electrophysiologists have a theory that predicts which people will get it and when? Do they understand the root causes? Does ablation “cure” the underlying causes? Is your profession treating the symptoms and effects (anti-arrhythmic drugs, anti-thrombotic drugs, and ablation), or is it treating the primary root cause(s)? Is all the understanding and treatment of LAF to be ridiculed because you are unable to predict who and when or to treat root causes? Or, is there value in listening to patients, anecdotal experiences, as well as controlled studies, and gradually building up a body of knowledge and practice that is useful, even if incomplete or not 100% predictive? If someone foolish if they disagree with that practice because you haven’t diagnosed a root cause, or are they highlighting a gap that needs to be filled? Is good scientific reasoning only inferential based on empirical evidence, or can it be deductive based on assumptions or axioms? How does that impact your predictive criteria for a good theory? How can one be sure one is starting with the correct assumptions? (e.g., that LAF must have an underlying natural root cause and thus is treatable by relieving the body’s underlying stressful condition, vs. that LAF has no knowable natural root cause and thus must be treated symptomatically with drugs or surgery).

    The argument for passive investing is a powerful one, primarily because it is mathematical in nature and thus based on axioms/deductive reasoning instead of statistical inference, though it is backed up by the latter as well. As Bogle has shown, when you consider transaction costs and management expenses, it is mathematically impossible for the average active fund to outperform an index fund. That is because for every winning trade there must be a losing trade somewhere else. Average these effects and subtract costs, and you end up with lower returns than a passive fund with its lower costs. But even here, it is helpful to consider the other side’s arguments. For years, people believed in active investing, but then it was debunked by academics (University of Chicago, especially) and the random walk hypothesis, efficient market theory, CAPM, etc., became dominant. Now, however, there has been enough research finding various anomalies to show that there was, in fact, a basis for believing that active investing could work. For purposes of this discussion, though, I’m interested in the “why”. Why did (and still do) people believe in active investing or its counterpart technical analysis? Many explanations have been proposed, but most relate to either (a) hidden risks–active investments that take on more risk may be more highly rewarded than passive investments with lower risk, and if this risk difference isn’t adequately accounted for, then investors may attribute it to the active investment strategy rather than to risk; (b) behavioral effects–there is in fact a behavioral/psychological component of market behavior, and skilled traders have in fact been able to exploit it. Theories are now being adjusted to accommodate both views. Andrew Lo’s “Adaptive Market Hypothesis” is one synthesis (or at least a synthetic framework). (As an aside, some of these behavioral models are rooted in evolution). I do believe that the average investor is best served by passive models, but trying to understand why belief in active models persists helps one develop more effective passive models. Thus, there now exist “fundamental index” funds, value funds, small cap funds, as well as profitable hedge funds that exploit anomalies (at least until they are arbitraged away). One reason active investing has worked is insider trading; that is less today than in the past due to recognition of the problem and more rigorous law enforcement.

    I think most of us would rather have a world view that is close to “the truth” than cling to a wrong idea. We may be prevented from changing from one paradigm to a new one for a long time, due to fears, peer pressure, incomplete understanding, limited time for analysis/thought, contradictory evidence that hasn’t yet been explained, etc. We may eventually reach a tipping point and change our views, or we might not. Most of us have changed our thinking in many areas of life over our lifetimes, usually more so in areas we have studied extensively than in those we have not (“the more you know, the more you realize you don’t know”).

    To denigrate those who believe differently than we do is arrogant (assuming WE “have the truth”), disrespectful (assuming others are too stupid or willfully dishonest to change their views), and ungrateful (not sufficiently recognizing the privilege we have had to have good parents, education, etc. compared to the limited opportunities many others have had to learn what we know). However, when we fail to ask “why” and try to understand why they believe what they do, we miss the opportunity to correct our own errors. Often, a theory may be basically correct (e.g., the ideal gas law), but needs refinement (e.g., corrections for molecular size and intermolecular attractions). The resistance of some people to the basic theory may be because it violates some truth that they know/feel. When the theory is adjusted to be more congruent with reality in total, then the resistance may disappear. How long it takes to disappear may depend on how we have treated these people, and how many insults we heaped upon them–how big their egos are and how much damage we did to them. Thus, mocking creationists, or climate change deniers, or “Tea baggers”, or even Austrian economists and day traders, might feel good, but it risks missing the opportunity to improve our own understanding of “truth” and also makes it more difficult for these others–and thus society as a whole–to align with “truth”.

    Given your roots, you really should examine what the Austrian economists were reacting to in a philosophical sense. See, for example. Your insistence on empirical prediction has flaws, according to this review’s analysis of logical positivism. (Such insistence makes all a priori theories such mathematics as unscientific–p.9). While I’m not an Austrian, nor an economist, nor a philosopher (thus effectively eliminating any credibility in what I’m about to say, which is my purpose! LOL), I think both deductive and inductive reasoning are useful in science and life, and both empirical and Aristotelian philosophies make important contributions. While I therefore disagree with the most extreme Austrian positions (e.g., against use of statistical inference), I believe they made important contributions. And, I agree with the insight that individual choices are what drive the economy, and while we might use statistical analysis of collective behavior, that doesn’t change the mechanism of action, and with it, an emphasis on individual vs. state action and power. The abuses of over-reaching states seem to me to far outweigh the abuses of individual liberty, if we want to use the empirical evidence of the past century.

    • Miles Dividend M.D. February 25, 2014 at 9:17 pm #

      We’re getting pretty far into the weeds here.

      You seem to be saying that because it is hard to design experiments, and one hundred percent confidence can never be obtained, that prediction has it’s limits.

      While I agree with this, the question that I have is, compared to what?

      And not to be too circular in my logic, but just look at what the scientific method has brought us. As a species We are living longer. We are living better. We’re supporting more people on the planet. We’re evolutionarily more successful. And most of this is thanks to the scientific method. It’s imperfect but powerful. And it involves evaluating outcomes in an objective a manner as possible.

      And this method is validated, even by those who purport to be against it.(I’m thinking creationists/fundamentalist Christians, Islamic fanatics who wish to bring back the caliphate, etc,) they all use the fruits of modernity to push forward their agenda.

      So why not use this rigorous, reality-based, methodology to help us assess the validity of various theories?

      Of course everything cannot be predicted by any one theory But when 2 theories are predicting opposing outcomes, wouldn’t it be foolish of us not to keep score of what the actual outcome is, and who is right?

      You seem to be advocating the evaluating of The validity of theories based only on your own personal biases, perceptions and ideology.

      How can this possibly help you to escape your own “shrink wrapped” ideology?

      And finally, I find your use of The lost decade in Japan to be a very poor metaphor for your argument indeed. Japan suffered from austerity for more than 10 years after the bubble burst. It was in a death rattle. It was only with The recent initiation of Abenomics, (aggressive deficit spending and stimulus) that the economy started growing again. Maybe it will end up poorly. But there’s both little evidence for that yet, and plenty of evidence that austerity was a disaster.

      • Robert February 26, 2014 at 7:18 am #

        On your last point, I disagree. I know you have a Japanese connection and so have doubtless followed the situation there closely. But, from everything I read, Japan bailed out a lot of banks and other enterprises that should have been allowed to fail. That is one of the primary reasons why their recovery has taken so long. Japan is no model for a free market economy. We have done the same thing here in the U.S. Bailing out banks hasn’t led to a more stable or safer banking environment, let alone federal fiscal health. We have instead just taught bankers that irresponsible risk is rewarded, while responsible banks end up paying for the irresponsible ones. Likewise, we “saved jobs” by bailing out GM to the tune of billions, but by saving GM, we prevented Schumpeter’s “creative destruction” to pave the way for new innovations. For example, don’t you think Tesla Motors would have an easier time of it if GM had been allowed to go into bankruptcy, instead of zillions of government dollars going to support their competitor, the Chevy Volt? How can innovation occur when the dinosaurs are kept on life support–with the costs borne by the innovators?!

        I’m not arguing against science or the scientific method. I am disputing the myth of how science actually gets done. The cooking is messier than the finished dish suggests. Any honest, long-time practicing scientist can tell you that. Then, when you consider the “science” of economics–“the dismal science”–it gets messier still. Things are much cleaner in the physical sciences than in the social sciences, and I was showing that even in the physical sciences it is easy to get tripped up. I’m not opposed at all to the idea of testing a hypothesis or model; my argument is simply that just because you think that Austrian economics predicts hyper-inflation from monetary easing in a particular financial crisis a few years ago, and that Keynesian economics predicts an economic recovery without inflation, that doesn’t mean that your assumptions, application of the theory, citations of adherents, or any other such things make that a valid application or test of the respective economics systems.

        Science is not the only system of knowing, and it has its flaws. I’m a strong proponent of science, but as a long-time practitioner, I have seen some of its weaknesses. The myth is not reality. Science gets done by scientists, and scientists are people. Like other people, they have strengths and weaknesses. Same is true for the people who use the fruits of science, make laws and regulations pertaining to science, etc. Thus, while science can be said to have been responsible for many advances in our standard of living and society, it also has been responsible for some of the most devastating failures. For example, it is food scientists who are partly responsible for the explosion of obesity in this country (to borrow a theme from our discussion on another thread).

        Science is self-correcting, but only to a degree, as recent research has shown. Negative findings rarely get published. Funding mechanisms enable the status quo (or industrial or government agendas). Fraud exists and is not always uncovered. Data-mining and other statistical errors are prevalent, especially in medical research. Replication of key experiments is often not done by other laboratories.

        Science may correct itself over time, but the public policy implications may never be corrected, or may take a long time. For a positive example, consider how science developed fluorocarbon propellants, then later discovered the impact on ozone reduction over the polar regions; it took decades before the Montreal protocol was agreed but in the end, it has been a good story of self-correction. Most scientists agree that CO2 increases are a direct result of the scientific/industrial age and its advances, and now scientists are promoting reduction in CO2 and other greenhouse gases. Society and politicians may eventually get onboard, but it will probably take more evidence of long-term effects before they do; there have been too many “council of Rome” type environmental “crying wolf” episodes over the years for people to respond quickly to these warnings. (Ironically, one reason such warnings have been premature is that they have consistently underestimated human ingenuity and scientific/technological innovation). In any case, this is another example of how the fruits of past scientific advances have borne bitter fruit for society–and potentially devastating fruit if the predictions for the next couple hundred years are correct and society doesn’t respond fast enough. (BTW, while I think “climate change deniers” do raise some valid points about past periods of global warming, the science seems pretty clear to me, and I fault Republicans who have taken the anti-science route. I also fault Democrats for seeking to exploit climate change to achieve social changes they want. Both parties willingly accept large donations from corporate interests on both sides of the greenhouse gas issue. By both parties seeking to exploit the issue for political/power gain, they are both responsible for the failure to progress on this issue).

        But, I’d like to conclude by returning to my opening theme and talking about risk and how applying a “scientific theory” to control risk sometimes (often?) results in unintended consequences. This is in part because science tends to isolate variables/components and look at subsystems in a controlled fashion rather than looking at whole systems. Policy-makers can be infatuated by theories that are correct but limited in their ability to predict results in complex systems.

        I remember touring western national parks and listening to rangers talking about the devastating effects of forest fires today compared to many years ago. This is due to “scientific forest management” in the past that had the policy of extinguishing forest fires as quickly as possible. Over the years, old, dry trees became dominant, along with lots of underbrush. Now when a fire occurs, it burns much more intensely and over a wider area than before. It is devastating. This to me is a metaphor for much of human intervention. Well-meaning people apply a theory–scientific or otherwise–to improve a situation, but unintended consequences lead to the outcomes that sometimes are worse than the problem that these people originally tried to fix.

        There are multiple examples of that in the physical sciences, whether we are talking nuclear power/waste, chemical pollution, many drugs that were commercialized, some medical tests (not much scientific support for mammography, is there?), or widespread antibiotics use. These are not exactly failings of science, but they are due to the application of science without a full understanding of the consequences, and even when the consequences are understood, they are done anyway because people or politicians have weaknesses (e.g., corporate financial support, avoidance of pain, etc.).

        In economics, it is the same story. Pain is avoided by applying a “scientific theory” but by doing so, a “moral hazard” is created, and investors are motivated to take even larger risks the next time. Eventually, a massive forest fire will come, whereas in the past it would have been smaller. Government bailouts/Keynesian stimulus (without corresponding out-of-cycle-phase “destimulus”, which is what Keynes proposed but politicians don’t do in a fiat money system) have this effect. Remember the last crisis and the wizardry that bundled high risk mortgages into securities that magically became investment grade, thanks to application of valid financial/economic models but without considering the full range of real-world complexity? Or, how about LTCM in the late 1990s? “Members of LTCM’s board of directors included Myron S. Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences for a ‘new method to determine the value of derivatives’.” How did that work out? Nothing wrong with the theory, really. Yet, applying it without consideration of the full range of factors in a complex real-world environment bankrupted LTC to the tune of billions of dollars. The entire derivatives industry, in fact, is based on valid but scope-limited economic theories like CAPM and Black-Scholes, but Warren Buffett (who makes a killing on derivatives despite this comment!) says derivatives are a ticking time-bomb. Derivatives were created to manage risk (e.g., the classic commodity futures for corn, wheat, soybeans, etc., help farmers and their customers manage price volatility), yet in the end, the unintended consequence is that they have become vehicles for excessive speculation and thereby have arguably increased risk to the financial system as a whole.

        • Miles Dividend M.D. February 26, 2014 at 8:56 am #

          I agree that economics is messy. I agree that science is messy. I agree that there are unintended consequences of action. I would assert there are also unintended consequences of inaction.

          I’m arguing neither that science is the solution to every problem, Or that the scientific method does not create new problems.

          Reading your argument, I am struck by how much of it I agree with, & how little of it is directed at arguments that I have made.

          All that I am arguing, and this post, in this discussion, is that we test our theories against reality to the best of our ability.

          What liberal wanted to bail out big banks? The question at the time was whether bailing out the big banks would be more or less destructive than not bailing them out. We will never know the answer to this question because there was no control group. But I am relatively comfortable trusting that the reason that both Bush and Obama supported the bank bailout, is that they thought it was the right thing to do. All we can say now is that there was a recession, but no depression. It is certainly possible that in the long run it was a mistake. And that it wasn’t.

          I do not have such a charitable view of climate change deniers. For the most part I see them in the same light as the scientists hired by tobacco companies to deny the overwhelming evidence of tobaccos health effects. Most are not honest skeptics, they are hired guns doing the bidding of large petrochemical companies. I would argue that You should at least acknowledge this dynamic when writing about climate change. It is an important one.

          Finally, I feel I am truly through the looking glass when reading your analysis of the financial meltdown in 2007 08.

          I will admit that the government played some role in creating the housing bubble. Certainly Fannie Mae was a player.

          But what is most obvious when looking at this crisis in retrospect, is that it was a gigantic failure of the free-market to correct itself.

          Alan Greenspan was asked repeatedly to allow Government agencies to regulate The derivatives market leading up to the financial crisis. His blind spot was his faith in the free market. In the idea that the market itself was better pricing risk than any government regulator could ever be.

          And derivatives themselves which were originally pitched as an idea for hedging risk, and for creating a more efficient market, became nothing more than an ATM machine for Wall Street paid for by the rapid exponential expansion of risk in the housing market.

          LTCM too was nothing if not a warning of the perils of Deregulation.

          The most down the line journalistic book that I have read on the financial crisis was “all the devils are here,”it is nonideological, and journalistic, it takes its title from The Shakespeare quote that “hell must be empty because all of the devils are here.”

          I think it would be a good book for you to read. You’d enjoy it.

          • Robert February 26, 2014 at 1:20 pm #

            I don’t think I said anywhere that I support climate change deniers. I did say they make some valid points about warmer periods in past history, and that is true. Greenland was green 1000 years ago (or something like that). In other words, while I think the science related to global warming/climate change is still developing, it is mostly on track, but it is ridiculous how every time there is bad weather (wintery storms or summer hurricanes) the talking heads get all excited about climate change. What the scientists are talking about is a long-term trend, and there is no way to prove that a given bad weather situation is due to manmade CO2. The talking heads predicted warmer weather and then it got colder. What I heard on TV didn’t match what I read in scientific journals. The scientists were responsible; the politicians and journalists were irresponsible. That is the context in which I say that the deniers had valid points–just because we have a warm summer or ice melts somewhere does not in itself constitute evidence of global warming because it does not exceed historical patterns.

            We’ll have to just disagree on the financial crisis. I see a lot of it as due to Greenspan’s intervention in the markets, inflating the housing bubble with low interest rates. What happened afterwards in terms of derivatives could indeed have benefited from regulation, though even there, I think there are problems because of the moral hazard. All the regulation in place didn’t prevent Bernie Madoff from doing what he did to securities investors.

            I have enjoyed this discussion but need to take a break and do some other things, as I suspect you do too. I’m sure there will be opportunity to pick up the discussion again in a future thread. I’ll be lurking awhile, at least until you provoke me again! LOL. (And thanks for the exchange).

          • Robert February 26, 2014 at 7:03 pm #

            I know I said I was just going to lurk for awhile, but I am catching up on my reading and was just thoroughly entertained by this (lengthy) “2013 year-in-review” written by Cornell University organic chemistry professor David Collum, who I’m just reading for the first time. Since he is thoroughly sarcastic, I think you’ll enjoy reading this too.

  2. Miles Dividend MD February 25, 2014 at 2:45 pm #


    I think I “walk in your shoes” each time we exchange ideas. I take your perspective very seriously, and certainly would not describe you (or creationists, or Austrian economists, or active investors) as an “enemy.”

    If I write in a polemical and sarcastic style, it is only because I am sarcastic, and this is my voice. (I also think it’s more engaging and interesting to read.)

    I both acknowledge that I am cherry picking easy arguments for my side in this post, and that I do not discount that there are equivalently powerful arguments to be made from the other side. Prediction cuts both ways (which is its power.)

    I am not going to make your argument for you though. What’s the point of that? There are already plenty of brash and polemical righties out there disseminating their ideas. Let me disseminate my own.

    I’m Not sure I understand your point about conflating practices and beliefs, please flesh this out.

    The main point about the Keyensians vs Austrians was simply that they were predicting opposite outcomes of a specific monetary policy at a specific point in time, (a liquidity crisis). Two different outcomes were predicted based on their models: (too much inflation, vs not too much inflation,) And there was only one outcome. (not too much inflation) I think it is fair to look at this outcome to determine which theory is more valid in this specific instance.

    I have no doubt that there are brilliant Austrian economists, who are good people, with well reasoned arguments. I have no doubt that they have made contributions to the study of economics, and will continue to do so in the future. But they should probably change their models in order to adjust to reality, as reality rears its ugly head. Otherwise they are unscientific, and are doomed to become less and less useful. (the same is true of the keyensians , of course.)

    The answer to your question about what I think the honest opinion of conservative pollsters was in 2012 is “I don’t know,” but by all accounts Romney was shocked that he didn’t win, and Rove’s performance on FOXnews strongly suggests that he was too. (unless he is a brilliant liberal performance artist.)

    I merely commented on the question of polling methodology, not “issue politics,” the morality of the respective parties, or anything else.

    And I (though I feel this is unrelated to this post) I heartily agree that we should follow the money, and go one step further, get private/corporate/union money out of elections.

    Not taking the bait on AF, sorry. Let’s agree to have that discussion in person. But I don’t disagree with most of what you suggest.

    On the creation piece. I never argue that creationists are stupid. I argue that they are unscientific, and (with visual sarcasm) hypocritical for using the tools of science to advocate against science itself, in the schools for example. The question of why fundamentalists are fundamentalists, is an interesting one. But it is a separate question.

    And equating evolution to nazi theories of eugenics is as flawed as equating science to scientology, and much more offensive. One need only investigate the predictive capability of eugenics to discredit it as a hypothesis. Score another one then for prediction.

    I don’t see much disagreement in our perspectives on investing, so I won’t comment further. (But is Lo the guy who relates momentum to capital flows in and out of money managers funds? If so, I’ve seen a youtube of his speaking, and it was very interesting stuff.)

    My aim here then was not to denigrate anyone, but merely to point out the power of using prediction as a litmus test to evaluate competing hypotheses. And I stand by that. It is the best check I know on ideology.

    My examples and tone are admittedly informed by my own ideology, biases and limitations, which I try to acknowledge in the post.

    And I am sometimes guilty of name calling in my posts, which does me no great credit. I do it to be funny. But it is also just a form of intellectual laziness.

    I reserve the right to be lazy and sarcastic if I think it makes my post better.

    I hope you will keep reading and pushing back.


    • Robert February 25, 2014 at 4:13 pm #

      “conflating practices and beliefs”–What I actually said was, “conflate the practices and beliefs of particular adherents or proponents of a theory/model with the theory/model itself.” In other words, don’t shoot the message if you shoot the messenger! :-) For example, you may not like what Ron Paul says, but that doesn’t mean he is an accurate representative of Austrian economics or that refuting him means you refuted a principle of Austrian economics. Or, you may not like what Karl Rove or Mitt Romney say, but that doesn’t mean they accurately reflect a “theory” of winning elections by Republicans (if such a theory existed). And, you may not like what a particular strain of creationist says, but that doesn’t mean they were accurate reflectors of creationist ideas in the first place or that creationism is invalid (though I think it is). I think one must grapple with the ideas themselves, not with the messenger.

      My point with eugenics was simply that the role of Austrian or Keynesian economics in predicting a particular outcome when government intervention is an uncontrolled variable is as much (i.e., as little) a test of a theory’s predictive power as saying that the eugenics movement was predictable from evolutionary theory. That is, just because some practitioners (i.e., those who practice/believe the theory) of evolutionary theory extend it to the social Darwinist realm and seek to accelerate the evolution of man to a superior being–a super race–through eugenics doesn’t mean that this is right or that the underlying theory is proven/disproven in any way.

      It is an indisputable historical fact that Ronald Fisher, the father of the so-called “modern synthesis” (merging Darwinian natural selection with Mendelian genetics), in his ground-breaking book, “The Genetical Theory of Natural Selection”, wrote several chapters promoting eugenics. This is but one example; several other leading evolution theorists promoted eugenics also. Does the theory of evolution necessarily imply eugenics? No. If I take my own advice and shoot the messenger not the message, I would discard this association. However, I made the point because you seemed to suggest that a theory was only valid if its predictions were validated. I’m saying that a practitioner could make a prediction (HYPER-inflation in the case of an Austrian economics disciple, for example, in a particular economic crisis) and be wrong, yet that doesn’t mean that the theory on which he allegedly based his prediction is thereby disproved.

      As for my continuing to read and push back, are you kidding? Please cancel my subscription and send me my money back! LOL. (Of course I’ll keep reading and pushing back! This is fun. Kinda).

      • Miles Dividend MD February 25, 2014 at 4:41 pm #


        Now I see your point and it is a good one. Generalizing from the believer to the belief system is a trap.

        The only problem with this observation is that there is no platonic ideal of “evolutionary theory,” or “Austrian economics,” (though perhaps there is of creationism; the bible.) We are left then to discuss the ideas as articulated by other imperfect humans such as ourselves.

        How would you suggest that we dissect the philosophy then from its adherants? Aren’t we stuck then, wading into the muck of humanity when we discuss any clash of ideas?

        And what better way do you have of evaluating a theory than to test it’s predictive ability?

        Isn’t this, in fact, how reality changing non intuitive theories like the theory of relativity are, in fact, validated?

        At some point I think you have to just fish or cut bait. Otherwise we are left saying things like; “But before I begin, a brief definition of “the”….


        • Robert February 25, 2014 at 8:34 pm #

          I suspect I’m not following you here, but it sounds like you are saying it is difficult to separate the philosophy from the philosopher unless it was handed down on tables of stone from God. Does it have to be 100% one way or the other? Can we contextualize the philosophy by understanding what the philosopher was responding to, but then have the freedom to separate the idea from the person so that we can better critique it, extend it, use it, or discard it, without regard to how the philosopher was aligned relative to other matters that we may agree or disagree with him on? You probably don’t have time to read it, but the link I sent earlier to the philosophical backdrop for Austrian economics helps one be able to do that with respect to Austrian economics. For example, I understand that it has Aristotelian roots, though not all Austrian economists share that perspective. I also understand it was a response to the German philosophy of Hegel (in part). Understanding the context helps one to understand its emphasis on personal responsibility, liberty, free choice, free markets, etc., as opposed to the state, the co-dependence of all, etc. But once I get a feel for this context, then I think I can select the elements that ring true for me and adopt them as my own philosophy. Is it true in some absolute sense? Probably not. But I can look for internal consistency, and see if it is consistent with my personal experience and my observations of the world, and if I think the underlying assumptions and logical arguments correct (though without philosophical training, I kind of have to follow the arguments of experts). Thus, for example, I might choose to take from both schools and conclude that Keynesian economics can predict the effects of monetary stimulus on short-term (business cycle) economic health, while Austrian economics might give insight into the effects of monetary stimulus on long-term economic health.

          It is interesting that you use the theory of relativity as an example. The theory was judged to be sound based on its mathematical correctness and assumptions. Experimental proof came later. (At least, that is how I remember the story from class many years ago; I may be wrong). As such, it is an example of a more deductive type of theory. explains that special relativity was based on axiomatic principles (the principle of relativity and the principle of the constancy of light) and Einstein deduced the rest from that. It is true that the theory made predictions that were verified by experiment, but note that the “truth” of the theory was determinable by verifying the math and correctness of the axiomatic assumptions.

          There are other ways science judges a hypothesis/theory besides predictive ability. For example, is it parsimonious (Occam’s razor)? I agree, though, that prediction is an important criteria. That said, (a) in complex systems, prediction may be impossible; (b) physics showed 100 years ago that our universe is not deterministic; (c) any test of predictability has to be designed and interpreted properly (fairly/honestly).

          Neuroscience may be able to develop an outstanding model of how your brain functions, but it may never be able to predict what your next thought will be. So, you must pick a meaningful test of predictability, not a test that can’t be passed or that misrepresents the tested ideas.

          Suppose we wanted to test the hypothesis that high dietary Na/K ratio produces cardiac arrhythmias. We might deduce that from a theory of cardiac muscle action and the various muscle membrane potentials and the effect of ionic concentration on transport. The theory could fail at this point because of: (a) flaws in the underlying theory from which the deduction is made; (b) flaws in our deductive argument; (c) related to “b”, the effect of additional unaccounted-for factors that alter the expected response even though the theory and deduction are otherwise correct.

          We could then test the hypothesis by devising and conducting various tests. For example, we could do epidemiological studies of dietary Na/K intake vs. incidence of arrhythmias. Or, we could measure urinary Na/K or serum Na/K content. Or, we could directly probe response to altered Na/K ratios in the diet. Or we could devise yet other tests. But herein one can appreciate the great difficulty in disproving a hypothesis: a test can fail because it was an invalid test, rather than that it disproved the hypothesis. For example, maybe we tested dietary Na/K intake in volunteers vs. a control group but we tested for 4 weeks when maybe it takes 3 months for the effects to be observed. Or, maybe urinary or serum levels of Na/K are not representative of concentrations or ratios in muscle tissue (i.e., maybe you need to use energy dispersive x-ray analysis of biopsy tissue or tongue scrapings or the like, e.g., Exatest). Or, maybe you are taking a drug that alters the ratio vs. dietary intake (a proton pump inhibitor, for example). Or, maybe this isn’t the relevant ratio, but is only correlated to the relevant ratio, which is in fact the Na/Mg ratio. Or, maybe you need to test Na/K/Mg ratios since all are relevant. Or, maybe these ionic ratios are only relevant in people with vagal type AF, not adrenergic type, so your predictive test fails. Or, maybe these are only important in athletes who undergo periodic dehydration and disruption to electrolyte balance. Or…!!!

          In a complex system, there are so many ways a test could be invalid or its results deceptive or hard to interpret! The reality is that it is hard to be confident about whether a theory “predicted” or “didn’t predict” a result. It is very easy to draw the wrong conclusions if the hypothesis isn’t formulated correctly, or if the wrong test is used, or if the results are interpreted incorrectly. And in real science, as opposed to some idealistic textbook example, there is a lot of intuition at play, many recycling-back loops in the hypothesis/testing process, false starts/dead ends (not because of fraud, though that happens too, but because of these effects in complex systems), and later corrections and refinements. A hypothesis that is “verified by prediction” might later prove to be false, and vice versa. So, often you have to use your gut and grope your way along in semi-darkness towards the truth, hoping you don’t make too many time-wasting false turns along the way.

          What about economics? An axiomatic argument might be that, “you can’t get out of debt by creating more debt.” An Austrian might deduce that even in a liquidity trap, creating more debt only puts off the pain (“kicking the can down the road”), while the Keynesian might argue that austerity measures will drive the economy into the ground and thereby create more debt as tax revenues are reduced, but by stimulating the economy and increasing debt avoids an economically devastating depression, and with a faster restoration of the economy (GDP, jobs, etc.), the debt can in fact be repaid faster. The reality is that due to politics, you never will get a clean test of these competing hypotheses. Politicians rarely vote for austerity, and if they do and the pain is deep, they get voted out, or the people riot, or the like. On the other hand, inflationary policies may not get you voted out of office (for awhile), but when out of hand, they ruin the economy.

          Still, we can make some tentative conclusions by looking at several countries and time periods. Japan, for example, has never bitten the bullet after its bubble/crash and is now in its third decade of economic recession (despite Abe’s Keynesian efforts), has racked up a huge debt (debt/GDP approaching 300%), still has zombie banks and other weak businesses that haven’t closed, and with its demographic problems and spiraling debt, Japan is running out of runway. Ireland suffered a devastating hit when its banks failed after taking on huge indebtedness from other EU countries and its government stepped in to guarantee those, leaving Irish taxpayers holding the bag. Ireland has managed to turn things around relatively quickly via an austerity approach. Greece has had austerity imposed on it from the outside, but its debt is so massive it can’t escape the debt trap without debtors writing off a majority of it, which they thus far have avoided, and without the Greek economy restructuring, which they are resistant to doing (unions, government employment, corruption, etc.). The U.S. has had a relatively fast recovery, as has the U.K., and both have done so with massive monetary stimulus (Keynesianism on steroids; what Japan is now doing under Abe). But the debt has skyrocketed, and asset prices have reinflated. If you look at jobs, unemployment numbers are deceptive since persistent (unreported) unemployment has increased (see Yellen’s recent testimony if you don’t want to take it from me). Still, you might judge the Keynesian stimulus a success (“proof of the theory”) based on employment recovery. However, the Austrians are also right–inflation has occurred (in assets if not CPI prices). As to the long-term effect of debt, see the Fed article I linked to long ago, where it is recognized that excessive spending and too little saving has slowed innovation/capital investment and slowed the economy. As debt continues spiraling, what is the outcome? Either we grow out of it through innovation and selling our products (to whom?), or we suffer a downturn until debt is paid down and equilibrium returns. I just don’t see how you can judge one or the other theory as being “predictive” in such a complex environment. There is evidence in some countries of an Austrian approach being better, and evidence in others of Keynesian approaches working. Thanks to complexity (different countries, timing, culture, etc., etc.) it becomes hard to test. But on an axiomatic basis, I learn towards the Austrian view over the long haul.

  3. Miles Dividend MD February 25, 2014 at 3:19 pm #

    One More Point. Semantics.

    I lump in momentum, and value, equal weighting, quality, and size based funds under the category passive investing as long as they have a priori trading rules that correspond to passive vehicles.

    The definition in this article works for me.


  4. Kat J February 26, 2014 at 6:50 pm #

    FYI….. You two should know that I’m firmly ensconced on the sidelines and soaking up the theories, philosophies, analogies, metaphors, humor, excellent writing, gentlemanly exchange/debate. As an intuitive, and current practitioner of a quantum physics based healing energy modality with a strong business and economics background, I’m enthralled. Thank you !! I’m positively encouraged and would LOVE to gather over a repast accompanied by fine wines and witness in person such informed, inspiring dialogue What a fantastic dinner party to imagine! Cheers!.

    • Robert February 26, 2014 at 9:15 pm #

      Kat, EFT perchance? (As a scientist I’m highly skeptical but have seen it work for others).

    • Miles Dividend M.D. February 26, 2014 at 11:22 pm #

      And here I thought we were two coyotes howling (droning?) into the wind. It’s good to be entertaining!


  5. Kat J February 27, 2014 at 1:28 am #

    Hi Robert,

    No, not EFT although I have been exposed to it and have an informal understanding of its basis. Generally I don’t attempt to explain what I see, hear and understand to scientific and mind/thinking based folk. Not because there is anything wrong with being such, but because I’m tuned to a different antenna with a differing amplitude than the “norm”, it is like speaking a foreign language. Rational can be so limiting sometimes. I can usually demonstrate how one can ‘feel’ and sense energy and once a person is available for a paradigm shift, it is easier recognize all kinds of other possibilities than those that we’ve previously been allowed to “know”.

    And, Alexi….. BEYOND entertaining! Like a caged working dog (Kat) I must exercise my logical reasoning mind and to me this is mind and philosophy candy that keeps my cogs greased so I don’t get bored playing Scrabble and the like.until I’m ready to chew my tail off! (or as of late…. play 72 holes of golf a week)

    Happy Thursday,

    ( Beef Wellington, phyllo wrapped, asparagus with Parmesan,, sweet potato and quinoa cakes with an avocado lime cilantro sauce….. baby greens with herb salad, followed with creme brulee …all with paired wines….???? I”ll Cook! If only the art form of dinner parties existed here.

  6. Miles Dividend M.D. February 27, 2014 at 11:56 pm #


    You had me at phyllo. I am RSVPing for all 5 Dividends. We are all foodies and 3/5ths of us love wine (the 4 and the 6 year old and I.)


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