Tuesday, March 1, 2011

Economists - Drawing opposite conclusions from the same evidence

Christina Romer tried to explain recently why people have opposing views on the expected inflationary effects of monetary expansion. She argued that it was a distinction between theorists and empiricists. Krugman disagreed by saying she was too kind – the other guys are just crazy:

I mean, yes, there are theoretical models in which monetary expansion translates immediately into sudden inflation. But these same models also say, essentially, that what we’re experiencing now — a prolonged period of high unemployment in which wage growth has slowed, but wages haven’t plunged — couldn’t happen. So to believe the inflation scare stories you have to be not just a theorist but a theorist who believes his theories, not his own lying eyes.

This seems wrong. No theory will be right in every detail across the board, particularly in economics, and there has to be some judgment as to what evidence is relevant and what evidence is not relevant. I’m often frustrated as well by how economists cling to (what I feel are) insane theories, but still - I’m sure Thomas Sargent could have sounded sensible defending the theories Krugman dismisses (see here, for instance), even though I also feel (?) pretty certain Sargent is wrong.

However, this reminds me of an interesting study which showed that exposing people to imperfect and non-conclusive evidence  (which is almost all evidence in economics, particularly macro-economics) can lead people with opposing views to move in different directions: An (old) experiment done on psychology undergraduates exposed people opposed and in favor of the death penalty to (fake) studies (emphasis added below):

[…] subjects supporting and opposing capital punishment were exposed to two purported studies, one seemingly  confirming and one seemingly disconfirming their existing beliefs about the deterrent efficacy of the death penalty. As predicted, both proponents and opponents of capital punishment rated those results and procedures that  confirmed their own beliefs to be the more convincing and probative ones, and they reported corresponding  shifts in their beliefs as the various results and procedures were presented. The net  effect of such evaluations and opinion  shifts was [an] increase in  attitude polarization.