Telling Stories

by Russ Roberts on January 31, 2008

in Fooled by Randomness, Sports, The Economy

Which of these stories is right?

The Giants will win the Super Bowl. They have the momentum on their side. They have a great pass rush. They will be more relaxed than the Patriots because they don’t have the pressure of the perfect season. They’ll be able to control the ball with Brandon Jacobs. Manning hasn’t thrown an interception in the playoffs.

Or is it this one:

The Patriots are the better team. They have Super Bowl experience. They have the better coach. Their quarterback is better.They will shut down the Giants running game and force Manning to make mistakes.

So which one is better? Neither, of course. They’re just stories. But on Monday, one narrative will look convincing and the other will look foolish. But of course there was no way to really know ex ante which story was better. Ex post it will seem obvious. But even ex post, judging the stories or the storyteller is just so much finger-snapping. It’s just one data point. Don’t be fooled by randomness.

Can a camel understand football?

Playoffswhatsupw

From the Asbury Park Press:

Forget what the sports analysts are saying. Super Bowl XLII will end
in victory for the New York Giants, according to Princess, "Popcorn
Park Zoo’s famous prognosticating camel," the zoo announced Monday.

Princess
had an 11-6 won-loss record for games picked during the season. And
"her playoff standings were phenomenal, selecting eight out of 10
winning teams. Last week she accurately predicted the Patriots for the
championships, but not the Giants," the zoo press release states.

Each
week, Popcorn Park’s general manager, John Bergmann, has had the names
of two teams playing that weekend written on his hands. Then he offered
Princess her favorite snack — graham crackers — in both hands.
Whichever hand she nibbled from, that was regarded as her choice in the
game.

"I can’t explain it, but her predictions, more often than
not, are right on the money," Bergmann said. "I’m hoping she’s right
this time, because I’m a Giants fan."

I think most people understand that the success of Princess is not due to her understanding of football, or her "gut feeling" or her intuition. It’s just random. But on Monday morning, some human football "experts" will seem smart and some less so, simply because of one data point, the result of Sunday’s game.

 

Which story is better:

The economy is in crisis. The subprime mortgage mess has taken down the housing market and thrown the banking industry into turmoil. The crdeit crunch that is inevitable will soon knock out other industries as well.  The anemic December job numbers (18,000 net jobs created) show are just the beginning of the problem. A recession is imminent or we may already be in one. We have to do something.

Or is it this one:

Yes, housing and banking are struggling. But the rest of the economy is healthy. The December job numbers were atypical. Unemployment claims are down. We don’t need a stimulus package.

Who is right? Tomorrow, February 1, the January job numbers will be released. There are hints that they will be very strong. Some people’s stories will look wise and others less so, at least for a while. If the numbers are strong, the worriers will find some other data point to wave around.

But I suspect the experts are like Princess, the pigskin prognosticating camel. We are fooled by randomness. We don’t really understand the macroeconomy. Certainly not enough to micromanage it.

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{ 18 comments }

colson January 31, 2008 at 10:42 am

This reminds me of the episode of Carl Sagan's show where he sat down with two newspapers and read the horoscopes. While his point was that it dealt in ambiguity, the result is somewhat similar. We are animals who look for patterns. When we recognize patterns we tend to give them much more weight than they are generally worth in most cases.

While the Wall Street Journal got rid of the column, I always remember checking in on the "dartboard" where industry "experts" went up against stocks picked by putting the broad sheet on a dartboard. It's always fun to see randomness beating the pants off of professionals.

David Peterson January 31, 2008 at 11:16 am

How do we know he didn't hold the Giants cracker closer to the camel's face? I smell a crackergate scandal.

The Albatross January 31, 2008 at 11:25 am

Hey Russ and Don, just a quick question,
I remember when the TV folks used to talk about economic growth, they always mentioned the weather. I am not talking about specific events—Katrina ect.—but the overall weather. We had very slow growth in the first quarter of last year, which then exploded in the summer and fall. However, if I remember the weather in the first quarter of last year was unseasonably cold and wet with winter coming late and destroying the wheat crop. Compare this to weather in the fourth quarter, which has been colder than usual, snowy, and icy—at least throughout the Midwest and even the South. I have had more issues getting about this year than in any other year within memory. Anyway, I know weather is a factor like all of the billions of other affecting the economy, but I would like to know you or Don’s thoughts on the relationship between weather and quarterly GDP growth.

DeeWilliams January 31, 2008 at 11:33 am

Russ,

I don't see why complexity of the macroeconomy should, by itself, dissuade from trying to smooth the business cycle.

The human body is also a very complex system that we poorly understand, yet we attempt to manage it all the time through the use of pharmaceuticals and a variety of medical procedures.

These "medical interventions" do not always work and can have unintended consequences on a person's health, but the vast majority of people are willing to take the risk. Even Robin Hanson goes to the doctor on occasion. Why? Because he, like the rest of us, percieve that these interventions can sometimes help more than they harm.

So the argument you REALLY have to make isn't that the economy is complex (duh), it's that the prescribed "medicine" in this situation will hurt more than it helps. Are you able to make that argument?

Jay January 31, 2008 at 11:38 am

"And her playoff standings were phenomenal, selecting eight out of 10 winning teams."

That's nothing. The Washington Redskins have picked 16 ot the last 17 presidential victors.

Floccina January 31, 2008 at 12:11 pm

Exactly why I insist that you cannot solve most big problems until they happen. Be it recession or global warming. On both so ar so good.

Floccina January 31, 2008 at 12:17 pm

Should have been:

So far, so good.

James Hanley January 31, 2008 at 1:12 pm

DeeWilliams wrote:

I don't see why complexity of the macroeconomy should, by itself, dissuade from trying to smooth the business cycle. The human body is also a very complex system that we poorly understand, yet we attempt to manage it all the time through the use of pharmaceuticals and a variety of medical procedures.

The answer is in comparing the empirical success of medicine vs. politics. Medicine tends to discard treatments that don't work, while our political leaders continue to think fiscal policy will do something.

Let's see, 3 months from now (a "quarter") I'm going to get an extra few hundred bucks. A) It's not enough for me to have much stimulus effect (I'll probably just make my credit card company unhappy by paying off the balance). B) It's awfully slow in coming. Who the hell knows what will happen in the meantime–it's likely to hit an economy that's already rebounded, in part due to the Fed's interest rate cuts. Fortunately it won't have much effect, or it could, at that point, cause the economy to overheat and result in inflation.

About all it will do is increase the deficit. Hooray.

Biomed Tim January 31, 2008 at 2:26 pm

Isn't this what Nassim Taleb calls "narrative fallacy?"

DeeWilliams January 31, 2008 at 3:51 pm

James Hanley,

But Russ' post implies that we should not even try to "micromanage" the economy through monetary policy. After all, the economy way too "complex".

I agree that there are reasons to dislike most (not all) counter-cyclical fiscal policies, but that was not what Russ was saying. He simply said the economy is too complex so we shouldn't try any "micromanagement" what so ever.

FreedomLover January 31, 2008 at 5:21 pm

Out country is littered with the shattered corpses of persistent narratives. The real thing to ask is why do we persist in any particular narrative without 100% cold, hard facts and logic to back up every single point?

vidyohs February 1, 2008 at 9:30 am

It could be said that there are 18 teams that have picked the Patriots to win on Sunday and the Giants are one of those 18.

muirgeo February 1, 2008 at 2:08 pm

"Who is right? Tomorrow, February 1, the January job numbers will be released. There are hints that they will be very strong."

Couple of todays headlines.

U.S. Economy Unexpectedly Sheds 17,000 Jobs

and

U.S. Economy Unexpectedly Sheds 17,000 Jobs

Who is right is a very good question.

muirgeo February 1, 2008 at 2:09 pm

Oops the other contrating headline was;

Exxon Mobil Profit Sets Record Again; $40.6 billion in net income

vidyohs February 1, 2008 at 3:50 pm

Can't answer that muirduck until we know who intercepted Exxon Mobile's pass out-of-bounds and fumbled the ball to 17,000 jobless. It's a nightmare that needs an instant rekick after a 20 yd penalty.

muirgeo February 1, 2008 at 4:27 pm

Quite simply the reason Exxon mobile is doing so well is because the government took $500,000,000,000 taxpayers dollars helping to secure their product. Meanwhile most of the people losing their jobs and paying those taxes didn't see new public and private jobs that could have been had we put the money into projects here at home. Likewise their homeland saw the potential economic benefits of roads, transport systems, schools ect go up in a burst of bombs for oil men and bomb makers.

The two headlines are quite related in that they are both a result of massive wealth transfers from working people to multi-national corporations and the military industrial complex Dwight warned us about.

But funny enough the business papers will talk about Exxon's profits as if they are a result of hard work and free market economics.

Is February 1, 2008 at 7:05 pm

So, why did they do so well prior to 2003 without our government spending $500 Billion to secure their product? Exxon was taxed at 41% last year. What was your income tax rate? Obviously, it is much higher given the transfer of wealth from hard workers to corporations.

dashafer October 1, 2009 at 3:16 pm

that’s a really good point.

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