Wednesday, October 12, 2005

To err or make an economic prediction is human

It seems to me the history of economics has been a history of modeling human behavior and decision making in particular. That explains why it has been so unsuccessful except when you hold "all other things being equal" or some other elaborate set of constraints and assumptions. Looked at that way, economic predictions aren't that much different than predicting where the dow is going to be next year. Both depend a lot on attitudes. The economy and especially consumer behavior and commodity pricing are subject to the same flux.
Micro = one human. Macro = group of humans in aggregate.
You would think that humans all lumped together would be more predictable (since things average out and irrational factors would be more obvious since more people would follow them), but it's the opposite. Microecon is generally the more practical tool. Walmart uses micro pricing models (albeit more elaborate and data-mine based than you find in textbooks), so they must work. Or maybe that's self fulfilling. Because Wal*mart (I think the asterisk is censored - like cussing in comic strips) sets a price based on a model of behavior, people follow and behave the way the price guides them to. Like people following the old K-mart blue light. They buy more cause it's flashing. It's not flashing because people buy more.

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