In a world that increasingly believes data is the new oil, we have an economics Nobel laureate suggesting data is overrated, especially when it comes to economics. Robert Shiller, the Yale professor who won the 2013 Nobel and known for his contrarian calls warning of a crash ahead of both the dotcom and housing bubbles, in his new book Narrative Economics suggests that we are better off trying to understand human behaviour and narratives thereof while predicting the future as opposed to endless data crunching. He cites the spectacular failure of most data driven models in predicting recessions across the world historically as a case in point to further his thesis. As the article shows, Shiller’s thesis has few takers given it threatens to debunk the status quo. Shiller himself acknowledges that more research needs to go into his thesis before it can be more widely accepted. “There are some economists who think that the economics profession should be a mathematical discipline. To me economics and other social sciences are part of a big picture. If we are trying to stay in the mathematical world, we may become irrelevant.”
“We are developing a new side of economics,” says Dennis Snower, president of the Kiel Institute for the World Economy in Germany, who collaborates with Shiller. “The standard statistical analyses are no longer valid. They assume that we know the probabilities with which everything will occur. In reality, we are almost never in that position.”
There is an opening for such a challenge in a field beset by numbingly bad forecasting. Among the misfires: the unprojected 2008-’09 financial crash, and the fatefully under-appreciated ferment of people “left behind” by globalization, in part responsible for Brexit and the election of Donald Trump. Economics’ miserable record goes back to the beginning of modern forecasting: Of 469 recessions around the world during the last three decades, the International Monetary Fund foresaw just four by spring of the prior year, Bloomberg reported. Private sector economists did no better: From 1992 through 2014, they projected just five of 153 recessions. In an op-ed at the New York Times in September, Shiller argued that the problem is fundamental. The leading economic indicators on which economists rely, such as interest rates and GDP growth, have been better at telling us where we have been than where we are going.
If the Chicago school is so bad at forecasting, how can it possibly be trusted to know how best to structure an economy? So it is that, though rational market advocates may not fully realize it, the times have made them exceedingly vulnerable. “I think of the current decade as comparable to the 1930s and the 1970s in the sense that a dominant approach to economic policy has come to a crashing end,” says Binyamin Appelbaum, author of The Economists’ Hour. “In the 1930s, it was the end of laissez faire; in the 1970s, the end of Keynesianism; in the 2010s, the end of blind faith in markets.”
…But are we excessively wed to data and numbers? A growing number of experts in diverse fields — from mountaineers to investors and economists — say we are: Our math mania has eroded our sense of intuition — Shiller says we are missing time-worn narrative clues to what’s really going on, while other thinkers say our primal “mental maps” have atrophied.
…Raghuram Rajan, a professor at the University of Chicago but not a “Chicago school” disciple, said that all economic models begin with a story and that economists then use data in an attempt to stand them up. Yet, he said, “when economists hear the word ‘stories,’ they wrinkle their nose and say, ‘This is below me.’”
…Trump is an epidemic all his own, says Shiller — “a 50-year epidemic.” “He is a very good observer of human emotions and seeing what works.” Why don’t Trump’s fans mind his tenuous relationship with the truth? In his book, Shiller cites a 2018 study in Science showing that false stories are tweeted six times more often than true ones. This is not because people prefer falsehoods, but instead that they have “the urge to titillate and surprise others,” he writes.”
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