Perhaps the new field of research should have a name based upon "apophenia" https://en.wikipedia.org/wiki/Apophenia , which is the human tendency to perceive meaningful patterns or connections in random or meaningless data. This trait likely evolved as a survival mechanism, helping early humans quickly recognize dangers or opportunities in their environment. If we don't see patterns naturally, we'll make them up, as our brains are wired to find order (and thus comfort) in chaos.
Carl Jung said: "Man has always lived mythologically; his understanding is conditioned by the need for patterns." It’s also connected to concepts like pareidolia https://en.wikipedia.org/wiki/Pareidolia , where we see familiar images (like faces) in unrelated objects, because recognizing patterns is comforting and helps us feel in control of our surroundings. This is why people see things in grilled cheese sandwiches https://www.nbcnews.com/science/weird-science/why-its-perfectly-normal-see-jesus-toast-n101511 and fall down conspiracy theory rabbit holes.
Apropos your example of the French Revolution, I have always been fascinated by the Butterfly Effect https://en.wikipedia.org/wiki/Butterfly_effect ; "[meteorologist Edward Norton Lorenz] discovered the effect when he observed runs of his weather model with initial condition data that were rounded in a seemingly inconsequential manner. He noted that the weather model would fail to reproduce the results of runs with the unrounded initial condition data. A very small change in initial conditions had created a significantly different outcome."
Very stimulating post. Unfortunately so implication-heavy I'll have to revisit it a few times to make sure I didn't miss something, so it's not the usual qick morning-coffee entertaining read.
Being German, I have to ask about what you write: Was folgt daraus? Whither does this lead? Does it mean, History is Bunk? Or maybe even, it doesn't matter for whom I vote, or what my elected officials do, because all is naught?
(In terms of finance, one remembers Tuld's "it's just money, Sam" speech at the end of Margin Call...)
I'd say keeping in mind some probable counterfactuals are in order. That the Venitians got so greedy they sacked Contantinople led to their downfall, but it wasn't a forced move. Al Gore probably wouldn't have invaded Iraq. Bismarck, von Papen and Brüning, all with their own separate stupidity, led to Hitler, but take away two out of these three...
He who turns us into tea leaves, robs us of free will. (Or agency, as young folks say.)
I think the key insight is not to over interpret past events. I agree we can learn something from the past. But we shouldn’t be too precise on our forecasts or too deterministic. The balance matters.
"There is no way to run the year 2024 thousands of times to see which economic or market development is just noise, and which one matters."
Just buy yourself a DeLorean.
You'd also be getting an appreciating asset. (well probably appreciating since the e in the predicted future values of petrol engine cars must be getting larger nowadays)
You write “The French Revolution may have been partly triggered by social inequalities and the industrial revolution was partly triggered by the invention of the steam engine, but there is nothing deterministic about these events.”
Please can you say why you think there is nothing deterministic about these events? Are you saying the world is stochastic, or in a sense influenced by true randomness? If so, where does that randomness come from?
Isn’t it enough to say that the future is unpredictable?
So, the reason why I say that inequality does not lead to revolutions is that for every revolution, I can find instances when inequality was defused by policy or simply led to dissatisfaction but not outright revolution.
For example, the extreme inequality in the US and Europe at the end of the Gilded Age in the late 19th century was largely defused by the introduction of income taxes and the labour union movement which ushered in fifty years of more of declining inequality. But no second French Revolution.
indeed what I am saying is that the world is nonlinear and stochastic which does NOT mean that it cannot be forecast.
Let me give you another nonlinear stochastic system: the weather.
You wouldn’t believe someone who tells you that next year on 31 October the weather in Boston (where I am right now) is sunny and 22C. But you do believe someone who tells you what the weather is going to be in the next one to five days. And you believe someone who tells you that summers in Boston are warmer and sunnier than winter. You might even believe someone who tells you that because of long-term climate change there will be gradually more hot days in Boston over time.
but note the difference in these forecasts. What we do in economics and finance is to predict where the S&P500 is going to be at the end of 2024 or 2025 and what kind of GDP growth to expect in 2025.
But that cannot be done. What can be done is to say that stock markets have momentum in the short run, so if the S&P500 has gone up in recent months it will likely continue to go up tomorrow or next week.
And we know stock markets are cyclical, so if the US goes into recession, the stock market tends to do poorly and vice versa.
That’s all we can do, really. The rest is just overinterpreting a random data generator.
Thank you very much for your considered response, Klement.
I am still not sure where the randomness you describe comes from. Another way of looking at things might be:
- the world is deterministic;
- things like seasons are predictable because we have good explanations for them (the earth orbiting the sun with a tilted axis);
- some things like future temperatures are subject to a great many deterministic effects, so many that forecasts are intractable;
- other things like future S&P 500 levels are not just subject to the above but also human creativity and choices, which are unpredictable (which does not necessarily conflict with determinism).
I very much agree with your points about the impossibility of running counter factual experiments and physics envy, though!
Isn't all social science improvisational? Humans are unpredictable so all strategies are emergent. I'm reminded of the ad campaign run by a well known burger place in the US, Wendys, that ran a campaign to reduce the price of their 1/3 lbs burger to match McDonald's 1/4 lbs. It failed spectacularly. When they did the market research to find out why it's because American's thought 1/3lbs was smaller than 1/4 lbs and therefore thought they were getting less for the same price! (That's why democracy doesn't work, but I digress...)And humans are terrible at prediction; we haven't predicted anything, e.g. fall of the Berlin Wall, Arab Spring, the Great Financial Crash...although scenario planning does help mitigate this to some degree.
I agree that history would look very different if key events had occurred in another era or country. Everything is highly context-, era-, and culture-specific, influencing how events unfold and spread within or outside a country.
The assumption that humans are rational actors is overly simplistic. While economics is trying to move beyond this, making social sciences resemble hard sciences like physics is challenging. Behavioral economics offers some insights, but experiments often depend on specific contexts and cultures.
We need a new approach to navigating the randomness in complex systems like markets and human behavior. We also do not teach enough about common errors and mistakes that people make. Most education teaches the outcome or a theory. Still, there is a lot of value in teaching how we got there and how mistakes, errors, and luck by others contributed to eventually reaching a working product or a theory.
One of my favorite quotes about history is:
"An intellectual ought to realize the extent to which the world is shaped by human emotions, emotions uncontrolled by reason." - B. H. Liddell Hart
Superb piece. One of the books that I personally despised for its ridiculousness was The End of History by Francis Fukuyama. It was specious nonsense for all the reasons described by Mr Klement. Turns out that only the excessive royalties (particularly in the atmosphere of Western triumphalism in the 1990s) paid to Dr. Fukiyama were predictable.
Perhaps the new field of research should have a name based upon "apophenia" https://en.wikipedia.org/wiki/Apophenia , which is the human tendency to perceive meaningful patterns or connections in random or meaningless data. This trait likely evolved as a survival mechanism, helping early humans quickly recognize dangers or opportunities in their environment. If we don't see patterns naturally, we'll make them up, as our brains are wired to find order (and thus comfort) in chaos.
Carl Jung said: "Man has always lived mythologically; his understanding is conditioned by the need for patterns." It’s also connected to concepts like pareidolia https://en.wikipedia.org/wiki/Pareidolia , where we see familiar images (like faces) in unrelated objects, because recognizing patterns is comforting and helps us feel in control of our surroundings. This is why people see things in grilled cheese sandwiches https://www.nbcnews.com/science/weird-science/why-its-perfectly-normal-see-jesus-toast-n101511 and fall down conspiracy theory rabbit holes.
Apropos your example of the French Revolution, I have always been fascinated by the Butterfly Effect https://en.wikipedia.org/wiki/Butterfly_effect ; "[meteorologist Edward Norton Lorenz] discovered the effect when he observed runs of his weather model with initial condition data that were rounded in a seemingly inconsequential manner. He noted that the weather model would fail to reproduce the results of runs with the unrounded initial condition data. A very small change in initial conditions had created a significantly different outcome."
Man, I just learned something. Apophenia...
This is an awesome read. Occam Razor is one of great mental models to emulate in demystifying flawed assumption
Thank you klement.
Very stimulating post. Unfortunately so implication-heavy I'll have to revisit it a few times to make sure I didn't miss something, so it's not the usual qick morning-coffee entertaining read.
Being German, I have to ask about what you write: Was folgt daraus? Whither does this lead? Does it mean, History is Bunk? Or maybe even, it doesn't matter for whom I vote, or what my elected officials do, because all is naught?
(In terms of finance, one remembers Tuld's "it's just money, Sam" speech at the end of Margin Call...)
I'd say keeping in mind some probable counterfactuals are in order. That the Venitians got so greedy they sacked Contantinople led to their downfall, but it wasn't a forced move. Al Gore probably wouldn't have invaded Iraq. Bismarck, von Papen and Brüning, all with their own separate stupidity, led to Hitler, but take away two out of these three...
He who turns us into tea leaves, robs us of free will. (Or agency, as young folks say.)
I think the key insight is not to over interpret past events. I agree we can learn something from the past. But we shouldn’t be too precise on our forecasts or too deterministic. The balance matters.
"There is no way to run the year 2024 thousands of times to see which economic or market development is just noise, and which one matters."
Just buy yourself a DeLorean.
You'd also be getting an appreciating asset. (well probably appreciating since the e in the predicted future values of petrol engine cars must be getting larger nowadays)
You write “The French Revolution may have been partly triggered by social inequalities and the industrial revolution was partly triggered by the invention of the steam engine, but there is nothing deterministic about these events.”
Please can you say why you think there is nothing deterministic about these events? Are you saying the world is stochastic, or in a sense influenced by true randomness? If so, where does that randomness come from?
Isn’t it enough to say that the future is unpredictable?
Hi William
So, the reason why I say that inequality does not lead to revolutions is that for every revolution, I can find instances when inequality was defused by policy or simply led to dissatisfaction but not outright revolution.
For example, the extreme inequality in the US and Europe at the end of the Gilded Age in the late 19th century was largely defused by the introduction of income taxes and the labour union movement which ushered in fifty years of more of declining inequality. But no second French Revolution.
indeed what I am saying is that the world is nonlinear and stochastic which does NOT mean that it cannot be forecast.
Let me give you another nonlinear stochastic system: the weather.
You wouldn’t believe someone who tells you that next year on 31 October the weather in Boston (where I am right now) is sunny and 22C. But you do believe someone who tells you what the weather is going to be in the next one to five days. And you believe someone who tells you that summers in Boston are warmer and sunnier than winter. You might even believe someone who tells you that because of long-term climate change there will be gradually more hot days in Boston over time.
but note the difference in these forecasts. What we do in economics and finance is to predict where the S&P500 is going to be at the end of 2024 or 2025 and what kind of GDP growth to expect in 2025.
But that cannot be done. What can be done is to say that stock markets have momentum in the short run, so if the S&P500 has gone up in recent months it will likely continue to go up tomorrow or next week.
And we know stock markets are cyclical, so if the US goes into recession, the stock market tends to do poorly and vice versa.
That’s all we can do, really. The rest is just overinterpreting a random data generator.
Thank you very much for your considered response, Klement.
I am still not sure where the randomness you describe comes from. Another way of looking at things might be:
- the world is deterministic;
- things like seasons are predictable because we have good explanations for them (the earth orbiting the sun with a tilted axis);
- some things like future temperatures are subject to a great many deterministic effects, so many that forecasts are intractable;
- other things like future S&P 500 levels are not just subject to the above but also human creativity and choices, which are unpredictable (which does not necessarily conflict with determinism).
I very much agree with your points about the impossibility of running counter factual experiments and physics envy, though!
Have a lovely time in Boston.
Isn't all social science improvisational? Humans are unpredictable so all strategies are emergent. I'm reminded of the ad campaign run by a well known burger place in the US, Wendys, that ran a campaign to reduce the price of their 1/3 lbs burger to match McDonald's 1/4 lbs. It failed spectacularly. When they did the market research to find out why it's because American's thought 1/3lbs was smaller than 1/4 lbs and therefore thought they were getting less for the same price! (That's why democracy doesn't work, but I digress...)And humans are terrible at prediction; we haven't predicted anything, e.g. fall of the Berlin Wall, Arab Spring, the Great Financial Crash...although scenario planning does help mitigate this to some degree.
Excellent post!
I agree that history would look very different if key events had occurred in another era or country. Everything is highly context-, era-, and culture-specific, influencing how events unfold and spread within or outside a country.
The assumption that humans are rational actors is overly simplistic. While economics is trying to move beyond this, making social sciences resemble hard sciences like physics is challenging. Behavioral economics offers some insights, but experiments often depend on specific contexts and cultures.
We need a new approach to navigating the randomness in complex systems like markets and human behavior. We also do not teach enough about common errors and mistakes that people make. Most education teaches the outcome or a theory. Still, there is a lot of value in teaching how we got there and how mistakes, errors, and luck by others contributed to eventually reaching a working product or a theory.
One of my favorite quotes about history is:
"An intellectual ought to realize the extent to which the world is shaped by human emotions, emotions uncontrolled by reason." - B. H. Liddell Hart
Superb piece. One of the books that I personally despised for its ridiculousness was The End of History by Francis Fukuyama. It was specious nonsense for all the reasons described by Mr Klement. Turns out that only the excessive royalties (particularly in the atmosphere of Western triumphalism in the 1990s) paid to Dr. Fukiyama were predictable.