Justin Wolfers & Betsy Stevenson have a piece up in Bloomberg, Crowds Are This Election’s Real Winners. In The Signal and the Noise Nate Silver has a chapter on Wolfers’ belief that prediction markets are superior to the sort of quantitative analysis that is his stock & trade. The belief isn’t based on an intuition. One of Wolfers’ graduate students produced a paper showing that Intrade was actually better than FiveThirtyEight in 2008. Silver demurs in the chapter because he suggests that the model which Wolfers and his student lay out in the paper had some modifications which allowed for one to judge Intrade’s performance superior. I’m willing to accept Silver’s assertion here because I’ve seen enough economic models which are modulated just enough to produce elegant and clean results. That being said, the general tone of the chapter is such that in his heart Silver seems to agree that Wolfers is fundamentally correct in the long term. Prediction markets, when done right, are more powerful than any analytic an individual could cook up.
All that being said, the economist’ faith on the power of mass market signals (“the crowd”) often strikes natural scientists as peculiar. When talking about elections it does seem that the “crowds” are going to be superior to the judgement of individuals or powerful quantitative models (after all, elections are about crowds!). But there is a long history of the crowd being wrong in the very specific areas of natural science which rely on contingent and formal fameworks to make non-obvious predictions on somewhat complex systems. But that’s because in some areas of the natural sciences humans have a systematic bias due to intuitive psychological tendencies. Aristotle’s model was just more intuitively plausible than those of his skeptics’ for a few thousand years. And quantum theory would never win a crowd-vote. One Bohr is worth a thousand other humans. I think this long history of the worthlessness of mass market intuition across large swaths of the territory of science is why many scientists find technocratic solutions very appealing. The formal reflections of the elect has worked miracles in physics, so why not “social physics” (i.e., economics)?
Obviously there’s a difference between the expertise of a nuclear physicist, an economist, a financial entertainer, and an astrologer. When a physicist speaks about physics, you listen, for they are describing the world. When an economist speaks about economics, you listen, because they are reflecting honestly what economists think about the world. When a financial entertainer speaks, you listen for laughs, because they are mixing substance and style to entertain you. When an astrologer speaks you are a fool to listen, because they are using the artifice of science to sell you nonsense.
Epistemology is hard. There is no “Swiss Army knife” which allows one to know how to know. In some circumstances the utilization of statistics is a matter of style, to firm up a flimsy supposition with the rigorous garb of quantity. The delusion of false precision. But in other domains statistical knowledge is highly informative. And there are areas where one can usefully deploy deterministic models.
The problem that crops up is when one swims in one lagoon of the intellectual pool where a particular suite of tools is useful, it is easy to forget that the utility of that kit may be conditional on the characteristics of that domain. Many physical scientists seem to have a tendency of assuming that there can be a simple and elegant technocratic solution (I believe that this is one reason engineers are attracted to religious fundamentalism). Meanwhile, I have observed before that biologists are often totally wedded to the Malthusian model for humans, when that model has not been fruitful for nearly a century. Biologists may be correct over the long term, but as an economist once observed, over the long term we’re all dead. Finally, economists can see markets everywhere, when sometimes it is not supply & demand, but ecology which is speaking. In A Farewell to Alms I note that Greg Clark argued that the emergence of lactase persistence was a sign of the longstanding high per capita income of Northern Europe, because Northern Europeans could afford to consume large quantities of milk. But of course there are ecological parameters which are relevant for how rational it is to engage in dairy-culture.
In the end, the only solution I offer is trial & error iteration. There is no market, no decision tree, which can guide us here. What works, works. What does not, does not. We muddle on.