More on the Old Joke About Why Economists Make Forecasts

Jared Bernstein extends on the answer “to make the weatherman look good”:

The piece in the Times got me thinking about this question of why members of my profession are competing with weathermen for accuracy kudos. So let me count the ways: here’s a list of reasons I think economists often get it wrong.

Jared was referring to this piece:

The assumption that underlies the project is simple: people respond to incentives. If you want people to do something, you have to make it worth their while. This assumption drives virtually all of economic theory. Sure, there are already many rewards in learning: gaining understanding (of yourself and others), having mysterious or unfamiliar aspects of the world opened up to you, demonstrating mastery, satisfying curiosity, inhabiting imaginary worlds created by others, and so on. Learning is also the route to more prosaic rewards, like getting into good colleges and getting good jobs. But these rewards are not doing the job. If they were, children would be doing better in school. The logic of the plan reveals a second assumption that economists make: the more motives the better. Give people two reasons to do something, the thinking goes, and they will be more likely to do it, and they’ll do it better, than if they have only one. Providing some cash won’t disturb the other rewards of learning, rewards that are intrinsic to the process itself. They will only provide a little boost. Mr. Fryer’s reward scheme is intended to add incentives to the ones that already exist. Unfortunately, these assumptions that economists make about human motivation, though intuitive and straightforward, are false. In particular, the idea that adding motives always helps is false. There are circumstances in which adding an incentive competes with other motives and diminishes their impact. Psychologists have known this for more than 30 years.

Jared adds four other pieces of baggage that we often carry around with us when we try to forecase the future:

There are other things economists do well. Our empirical methods, in the right hands, can be highly informative and useful. But, like Yogi said, prediction is hard, especially when it comes to the future. When you’re carrying all this baggage along with you, it’s even harder.

I don’t even try to forecast. And if I did try forecasting something like the stock price of a company, most of my friends would likely short sell the stocks that I think will do well. But the local weatherman is saying the Fourth in LA will be hot and sunny. You think?

Update: William Polley comes to the defense of traditional economics in a post entitled Does Tiger Woods ever play golf just for fun?. After a lot of reflection on the op-ed by Barry Schwartz, Bill answers his rhetorical question:

Would Tiger Woods play more golf than he does now if he was only doing it for fun and there was no financial reward? Probably not. So Tiger Woods appears to be responding in a standard economic way to the incentives, but the children in the study are not. What gives?

Hmm. Nursery school children don’t have to make choices as to the allocation of their scarce time which would fundamentally impact the economic well being of their families. But adults do. Hey, I would love to run more but my talents aren’t such that I could make a living doing so. Alas, the talents that pay me involve sitting at a keyboard writing. Then again – I’m not paid to blog so one does have to wonder why I’m doing so right day and not running down some Los Angeles trail. Oh wait – it’s that weather thing again. If only we had an air conditioned indoor mall with a track around it.