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Andrew Lo and Mark Mueller at MIT have a paper called “WARNING: Physics Envy May Be Hazardous to Your Wealth,” also available as a video.? The takeaway, which?is equally relevant to Development as to Finance (the actual topic of the talk), ?is that inability to recognize radical?UNCERTAINTY?is what leads to excessive confidence in mathematical models of?reality, and then on to bad policy and prediction.?
Imagine how much harder physics would be if electrons had feelings! (R. Feynman)
The key concept of the paper?is to define a continuum of uncertainty from the less radical to the more radical. You get into trouble when you think there is a higher level of certainty than there really is.
1. Complete Certainty
2.??Risk without Uncertainty (randomness when you know the exact probability distribution)
3. Fully Reducible Uncertainty (known set of outcomes, known model, and lots of data, fits assumptions for classical statistical techniques, so you can get arbitrarily close to Type 2).
4. Partially Reducible Uncertainty (“model uncertainty”: “we are in a casino that may or may not be honest, and the rules tend to change from time to time without notice.”)
5: Irreducible Uncertainty:? Complete Ignorance (consult a priest or astrologer)
Physics Envy in Development?leads you to think you are in Type 2 or Type 3, when you are really in Type 4. This feeds the futile search for the Grand Unifying Theory of Development.
?Type 4 “model uncertainty” seems even more likely in development than in finance, theory is a lot better developed and produces more precise hypotheses in the latter than in the former (but even I am not so skeptical to think that we are in Type 5 in development).
What to do about large uncertainty in development? Obviously not a question that can be answered in one sentence.??Maybe we can start by discussing social systems that allow decentralized?agents to solve?their own problems that feature less uncertainty, and doesn’t require any centralized?agent to know the uncertain whole model of the whole system.
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Five Filters featured article: Beyond Hiroshima - The Non-Reporting of Falluja's Cancer Catastrophe.
Andrew Lo and Mark Mueller within the MIT have a document called "warning: Physics envy can be hazardous to your Wealth," also available as a video.? The takeaway, which is also relevant to the development of Finance (the real subject of the talk), is the inability to recognize the radical uncertainty is what leads to excessive confidence in mathematical models of reality and bad politics prediction then.
Imagine how much more difficult if the electron had feelings physics!(Feynman r.)
The key concept of this document is to define a continuum of uncertainty less radical than radical.Vous get problems when you think there is a higher level of certainty that it really is.
1 Certainty full
2 Risk without uncertainty (random when you know the exact probability distribution)
3 Full reducible to uncertainty (result set, known model and lots of data, known classical statistical technical assumptions adjustments, so you can get arbitrarily close to type 2).
4 Partially reducible to uncertainty ("model uncertainty": "we're in a casino that may or may not be honest and rules tend to change from time to time, without notice.")
5: Irreducible uncertainty: complete ignorance (refer to a priest or astrologer)
Envy physics developing leads you to believe that you are type 2 or type 3, when you really are type 4.It feeds the futile search for great unifying theory of development.
Type 4 "model uncertainty" seems more probable in development in the financial field, theory is much more developed and produces more accurate assumptions in the latter case than in the first case (but, I'm not so skeptical to believe that we are in the type 5 in the development).
What to do on the uncertainty in the development? obviously not a question can be answered in a sentence. maybe we can start by discussing the social systems that enable decentralized agents to solve their own problems this feature less uncertainty and doesn't require any agent centralized to uncertain whole model of the entire system.
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