If your model has always been wrong

Piet, a reader who comments from time to time on this blog, hasn’t enjoyed what I’ve said about the economy recently. I’ve tried really hard, entirely ineffectively it seems, to answer his points and tease out exactly where his real problems lie.

This post by Paul Krugman talks exactly to “Piet’s views” – the deep-seated emotional views and ideologies that “must” make sense without the careful thought, analysis and model-building required. The same views that have proved almost completely ineffective at predicting anything so far.

Lots of people declared that they “just couldn’t believe” that huge budget deficits wouldn’t drive up interest rates, that “printing” lots of money wouldn’t cause runaway inflation, that slashing government spending wouldn’t have a positive effect on confidence. We know how that has turned out.

Paul doesn’t talk in this post about those who then start changing the facts that don’t agree with their views. “Inflation must be high because the Fed is printing money, but inflation isn’t high, therefore the measure of inflation must be wrong.” – even though multiple independent measures suggest the same level of inflation.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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