Thursday, February 3, 2011

Why intuitive stories are important and dangerous

Below are some excerpts from a blogpost on the importance of "simple" stories/models that Paul Krugman praised on his NYT blog. I fail to find a simple moral to the story as it seems (to me) to involve a lot of different views on this issue, such as (in my formulations):

"Simple case-stories/thought-experiments are a necessary adjunct to sophisticated models/theories - because we cannot reason using models but need simplified versions that our brains can grasp"

"Simple case-stories/thought-experiments are rhetorically convincing in discussions/debates"

"Simple case-stories/thought-experiments trigger the psychological feeling of understanding/insight which is a better signal of truth than other kinds of evidence"

"Formal/standard models in economic theory are accepted because other economists accept them (emperor's new clothes) but people who accept them don't really understand the mechanisms they involve"

"Economists are confused concerning what it takes to evaluate claims about the real world"

Here's part of Krugman's comment on the same post ( ):

"I have nothing against mathematical models and econometrics. But my experience is that many misunderstandings in economics come about because people don’t have in their minds any intuitive notion of what it is they’re supposed to be modeling. The whole notion of an economy-wide shortfall in demand is just hard to grasp — by famous economists as well as the lay public; quite a lot of our hopeless public debate reflects the fact that many people, some of them imagining themselves to be sophisticated about the issue, just can’t visualize what Keynesian ideas are about. But the baby-sitting coop offers a human-scale example, and makes the whole thing clear."

Amplify’d from
more than any other analysis the baby-sitting coop story made me a confident Keynesian. Before then I could parrot the New Keynesian models and understood that this was more or less what a smart economist was supposed to say.

However, I didn’t know how to counter the logic of Laizze Faire except to say, “well there are sticky prices and an Euler equation and so the household will adjust consumption . . . “  This is compelling to virtually no one – not even, on a deep level, to myself.

When it really came down to it, I would have been left with “Great Depression! Want it to happen again? No? Then we need to spend more money or cut taxes! Why? Because I am very smart and I have a whiteboard. Do you have a whiteboard?”

However, a simple story about baby-sitting and it all fell into place

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