There is a very interesting article in Wired this month, ostensibly about the tribulations of the modern scientific method, big pharma’s drug development approach, etc. But within the article is an excellent digression about the complexities of causation:

“Causes are a strange kind of knowledge. This was first pointed out by David Hume, the 18th-century Scottish philosopher. Hume realized that, although people talk about causes as if they are real facts—tangible things that can be discovered—they’re actually not at all factual. Instead, Hume said, every cause is just a slippery story, a catchy conjecture, a “lively conception produced by habit.” When an apple falls from a tree, the cause is obvious: gravity. Hume’s skeptical insight was that we don’t see gravity—we see only an object tugged toward the earth. We look at X and then at Y, and invent a story about what happened in between. We can measure facts, but a cause is not a fact—it’s a fiction that helps us make sense of facts.”

I am not sure I completely endorse Hume’s perspective, but I recognize the very insightful Truth he discovered about the concept of causation: We humans love a grossly over-simplified narrative. It is the way we evolved. There are situations where long contemplation before taking action an be fatal — using shortcuts is effective and functional; it helps us to make snap decisions in the wild:

“The truth is, our stories about causation are shadowed by all sorts of mental shortcuts. Most of the time, these shortcuts work well enough. They allow us to hit fastballs, discover the law of gravity, and design wondrous technologies. However, when it comes to reasoning about complex systems—say, the human body—these shortcuts go from being slickly efficient to outright misleading.

A century and a half after Hume, Belgian psychologist Albert Michotte conducted studies in the 1940s, discovering “the launching effect,” a universal property of visual perception. The human visual process is filled with cognitive extrapolation. We construct our understanding of the world visually with much less data than we realize.  Michotte showed how people rationalize what they see, creating false narratives that facilitate navigating the world:

“There are two lessons to be learned [from Michotte's experiment's]. The first is that our theories about a particular cause and effect are inherently perceptual, infected by all the sensory cheats of vision. (Michotte compared causal beliefs to color perception: We apprehend what we perceive as a cause as automatically as we identify that a ball is red.) While Hume was right that causes are never seen, only inferred, the blunt truth is that we can’t tell the difference. And so we look at moving balls and automatically see causes, a melodrama of taps and collisions, chasing and fleeing.

The second lesson is that causal explanations are oversimplifications. This is what makes them useful—they help us grasp the world at a glance. For instance, after watching the short films, people immediately settled on the most straightforward explanation for the ricocheting objects. Although this account felt true, the brain wasn’t seeking the literal truth—it just wanted a plausible story that didn’t contradict observation.”

Of course, those survival aids don’t work well when it comes to complex risk analysis in financial markets:

“This mental approach to causality is often effective, which is why it’s so deeply embedded in the brain. However, those same shortcuts get us into serious trouble in the modern world when we use our perceptual habits to explain events that we can’t perceive or easily understand. Rather than accept the complexity of a situation—say, that snarl of causal interactions in the cholesterol pathway—we persist in pretending that we’re staring at a blue ball and a red ball bouncing off each other. There’s a fundamental mismatch between how the world works and how we think about the world.”

This has come up repeatedly over the years — especially with regard to the financial crisis and the Big Lie. It is not too generous to say that these folks are not evil, they merely carry the vestiges of evolution — a flawed analytical engine of which they seem wholly unaware of.

For the rest of us, there is self-enlightenment. If we develop some awareness of these analytical errors, or our cognitive foibles, we can at least stand a fighting chance to go beyond erroneous perceptions towards truer understanding:

“The good news is that, in the centuries since Hume, scientists have mostly managed to work around this mismatch as they’ve continued to discover new cause-and-effect relationships at a blistering pace. This success is largely a tribute to the power of statistical correlation, which has allowed researchers to pirouette around the problem of causation. Though scientists constantly remind themselves that mere correlation is not causation, if a correlation is clear and consistent, then they typically assume a cause has been found—that there really is some invisible association between the measurements.”

In other words, yes, we can figure out actual causation.

Where I part ways with Hume is in looking at causation analysis as merely competing stories tying two facts together. It is larger than that, there is Causation-in-Fact. At the very least, we can eliminate the narratives that are demonstrably false. But to do so, we need to avoid the over simplifications, the correlation errors, the misapplied data, and recognize the complexity of causation in the world of finance.

For investors, the alternative is to live in a world of expensive cognitive errors . . .

>

Source:
Trials and Errors: Why Science Is Failing Us
Jonah Lehrer
Wired January 2012
http://www.wired.com/magazine/2011/12/ff_causation/all/1

Category: Philosophy, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

51 Responses to “Hume, Causation & Science”

  1. ToNYC says:

    Good science puts cause at the end of the line (process), whereas human nature, to avoid doing the real work of thinking, will always put it first. You can’t sell good science; it’s bitter medicine and always steps on some old money. The narrative is what sells, and we can scientifically prove it, just you watch. In any event, science was bought in my eyes in the sixties to pay for what JFK didn’t want to do and paid the now famous Karen Silkwood prize, and only exists now as a tool of monopoly domination. Mathematics is the only hard science an independent human can afford to practice.

  2. A Farmer says:

    Come on, Barry, you’re letting everybody in The Big Lie propagation off the hook here. Sure the rubes may be too accepting of a simple explanation of a complex system, but their issues go deeper here, to a rejection of science to protect a corrupt type of religion. For the followers, this is another case of ignoring uncomfortable facts which conflict with their belief system. They do the same with science and evolution, and their belief system now encompasses capitalism and politics. They believe that all the things they hold dear are right, just and infallible. Any fact to the contrary is ignored.

    As for the perpetrators of The Big Lie, they know better, and their incantation of The Big Lie is evil. They are directly manipulating their followers for their own personal gain and undermining the only other system which has the power to stop their looting, the government. They know exactly what happened in the financial system, and they want to allow such abuses to continue. There is no earthly way that Peter Wallison is so ignorant as to not know that mortgage brokers, large commercial banks and investment banks were at the heart of the financial crisis. He is pinning the blame on government to undermine the credibility of government as a solution to the problem. He is manipulating the rubes to continue the grift. That is evil.

  3. A Farme:

    Perhaps you are correct.

    It is the weekend, and I was aiming at a larger “think piece” rather than merely repeating my same accusations again and again.

  4. theexpertisin says:

    Can this be summarized on a bumper sticker so political activists will comprehend it?

  5. Petey Wheatstraw says:

    Philosophically, the most important question that can be answered is “why.” Who, what, when, where, and how, always take a back seat to why. ”Why” begs for causation to be identified.

    Lately, and as A Farmer hints at, the false (mis)statement, “Correlation is not causation,” ( and it’s even less correct derivative cousin, “correlation does not imply causation”), has come to the forefront as a pseudo-logical rebuttal to any idea that is distasteful to anyone desiring to have their belief system validated in spite of fact.

    Everything has a cause. Identifying the cause of any particular event or circumstance might be difficult, and there may even be several components that, together, cause an event, but rest assured, there is a cause for everything — even our existence.

    Can’t finish this comment beCAUSE I need a haircut. Why?

    To remain stylish.

    This does not answer why my hair grew, but it does seem to indicate that my devotion to fashion (and my ego), are the cause of me getting into the car and heading to the barber.

    See ya!

  6. InterestedObserver says:

    @ A Farmer: “There is no earthly way that Peter Wallison is so ignorant….”

    I’m a physical scientist in my day job and I’ve seen the same dance play out in the realm of dry and “simple” physical phenomena which are generally well known.

    I don’t really know if it’s the case with Wallison, but yes, people can be that ignorant even in fields in which they and others consider themselves somewhat expert. It’s a sight to behold, but it’s one that occurs on a daily basis simply because most folks can’t be bothered to perform those internal reality/consistency checks on what they maintain they know. The really sad aspect of it is that they would maintain they’re employing the data in a completely objective fashion.

    It’s an unfortunate reality that self-delusion is not subject to self-diagnosis.

  7. NeutralObserver says:

    This post is an a good example of what I really appreciate about your blog Barry. Unique, insightful, thought provoking.

    I just noticed how much religion and economics have in common. Both inventions of the mind to describe the behavior of the world. Both are dogmatic, and have their zealots who cannot be persuaded by data. And then there is “Mr. Market”… next time you hear a personification of “The Market” or the term “Mr. Market”, instead substitute the word god or “the gods” and note how it sounds.

    Thanks Barry.

  8. jus7tme says:

    >>This has come up repeatedly over the years — especially with regard to the financial crisis and the Big Lie. Its not that these folks are evil, they merely carry the vestiges of evolution — a flawed analytical engine of which they seem wholly unaware of.

    It is no just their analytics that are flawed. It the fact that their rampant self-interest is clouding the truth.

    ~~~

    BR: heh heh Potato/Potatah

  9. A Farmer says:

    I’ll second NeutralObserver’s compliments toward this blog. I’ll also follow up on the observation about how much religion and economics have in common. I would posit that economics and politics are just applied philosophy and religion. That is what drives my interest in each of the applied fields. I personally am fascinated by what people believe, and how they put those beliefs into action, and economics and politics are where the rubber hits the road.

    The idealistic view of science is that it allows observations to override belief. My understanding is that Hume tended toward the generally fatalistic view that even science was unable to overcome this human weakness toward simple explanations.

  10. jus7tme says:

    >>I would posit that economics and politics are just applied philosophy and religion.

    Politics is 90% applied self-interest. But a large fraction of the population is so confused by propaganda that they mistake other people’s self interest with their own. All the lower middle-class people that vote Republican fall into this category.

    The 10% of the population that actually have some degree of principle that they place above their own self-interest never get heard.

  11. The underlying consistent element in Economics and Religion — and we can add Politics to the mix — is ideology.

    These all tend to be faith based belief systems; they eschews factual proof such as data; The coin of the realm of these are unproven tenets, assumptions and beliefs.

  12. A Farmer says:

    I think the justification much of the evangelical base of the Republican party has for voting Republican is that they think it is a way to apply their religious beliefs to society at large. The economic interests who benefit from Republican economic policy have been able to seize on the beliefs of self-reliance and an interested God who rewards the hard-working and punishes the indolent, which are at the heart of the Calvinism, and has been so strong in America throughout our history. They are able to manipulate that to achieve their goals.

  13. primordial_ooze says:

    The need for a simple explanation of events I think just reflects the evolution of our brain. We have to be able to make a quick judgement to ensure survival, at least this was very important in the past. Now we live in an incredibly complex world. We can’t comprehend it that well and we are always trying to simplify it to a few things that cause the events we see. The most important systems that exist are all dynamic non-linear systems that we don’t have good models for. By the nature of these systems our intuitions are not worth too much for understanding them. I am thinking here of the global climate system, the global financial system, the immune system, the brain, etc. These systems are so complex as to be not completely understandable. They have parts that operate over all time scales, from minutes to decades, or longer, on all scales of size, have many pieces we don’t even know about, etc. When we examine them we try to isolate a piece of them and then think we have an understanding. However, those pieces may not operate that way at all when it is part of the whole. It is folly to think that we have a complete understanding of any of them.

  14. Bill in SF says:

    This human perception idea may help explain why some of us have such a difficult time with technical analysis. I can watch a ball sail through the air, and by following its arc, make a pretty good guess where it will land. However, when I look at a stock chart with a similar trajectory and bet on where it’s going in the future, I often have my hat handed to me.
    I have famously (well, in my family at least) experienced owning a number of stocks that appeared to take the stairs up and the elevator down, sometimes using an empty shaft. Conclusion; Gravity Sucks!
    But wait, isn’t that a vacuum? No, my sister will tell you a vacuum is that space between my ears. Anyway, if you invest long enough, you will eventually grasp the difference between gravity and a vacuum. Gravity makes things collapse; a vacuum makes them evaporate.
    Time, now that’s a concept we may never figure out.

    Now, on a lighter note, if someone would just explain this causality thing to Tim Tebow…
    Oh, wait!

    http://www.hulu.com/watch/ad/78412

  15. ToNYC says:

    “Can this be summarized on a bumper sticker so political activists will comprehend it?”

    Your Lie. Sold to You.

  16. mark says:

    Its not that these folks are evil, they merely carry the vestiges of evolution — a flawed analytical engine of which they seem wholly unaware of.

    Pretending that people like Wallison and the the other Big Liars are well intentioned but mistaken is naive or disingenuous.

    The underlying consistent element in Economics and Religion — and we can add Politics to the mix — is ideology.

    These tend all are faith based belief systems; they eschews factual proof such as data; The coin of the realm of these are unproven tenets, assumptions and beliefs.

    I’m glad that you didn’t include science in your list. Individual scientists will often hold onto theories they championed early in their careers regardless of subsequent evidence clearly showing the old theory to be wrong. Eventually however the old erroneous theory goes away (usually to be eventually replaced by something). Not so in economics, politics or religion.

  17. mark:

    My initial response to the ravings of Pinto & Walliston et. al. is to lash out emotionally: Those lying fuckers! Cocksucking bullshit artists! etc.

    But I rarely find my first emotional reaction to be the best one. Consider my offer of their cognitive dissonance as an act of generosity on my part.

    I am trying to grow up as I grow older . . .

  18. A Farmer says:

    Again, Barry, as NeutralObserver stated and I second, your blog is extremely valuable for the unique perspectives provided. I wasn’t intending to hijack a very thought-provoking article by dragging it into the political sphere, but the perniciousness of the Big Lie gets to me once in a while.

  19. MrPickle says:

    My gripe is the moronic framework in which people confine themselves. I recently corresponded with Edward Pinto of AEI after he published the worn out, thoroughly dis-proven argument that the GSEs were responsible for our mortgage crises. http://www.realclearmarkets.com/articles/2012/01/12/fannie_and_freddie_contaminate_global_mortgage_market_99455.html
    He replied with a list of links which supported his faulty assertions; the implication being that there is a substantial body of evidence which contradicts the known facts. What is frustrating is that conservatives (and I use the term very loosely) agree upon a meme generated by their network of think-tanks in order to avoid responsibility for a crisis which happened under their watch. It is then systematically distributed and generally accepted by their minions in the media and politics as being economic fact. This model has worked fairly well for them in the past but the feedback loop which they have created becomes steadily and more destructive as time passes.
    Whoops moments like invading the wrong country after 911 or the meltdown of 2008 are never clearly understood by the voting public. Honest intellect applied to issues of enormous national and world consequence is systematically stifled for the sake of political expediency. Not to mention the fact that denying responsibility for your actions shows a degree of emotional instability which only makes finding solutions much more difficult.

  20. Frilton Miedman says:

    “I see dead people.”

    ” Walking around like regular people. They don’t see each other. They only see what they want to see…….”

  21. bear_in_mind says:

    Excellent article – and discussion!

    Years ago, I took a critical thinking course to transfer from JC to university and was one of the most valuable classes in my educational life. Won’t bore with details aside from our exploration of 7-8 categories of “cause” and their validity, implications, etc. It was a great basis for understanding the nature of thought — yours and others.

    I think part of what this discussion taps into is the battle over the last 40 years (esp. in America) to attack the socio-cultural reverence for science. Opponents cited scientific fallacies or areas yet “unproven” and interjected faith and belief as equivalent forms of reason. Anyone with even a cursory knowledge of history senses the potential danger in this shift.

    I would suggest this coincides with a fundamental and pervasive change in how popular consent is shaped through the aggressive application of cognitive psychologists and linguistics. Interest-based groups began using these scientists to create messages telling constituents what they ‘want to hear’ (i.e. faith & belief) with a moral rationales (i.e. reason) that comport with these feelings and beliefs.

    This effort began in think-tanks, but didn’t take long to spread into mainstream application. What distinguishes this from advertising? IMHO, it shares the same corrosive quality of classic propaganda — it claims something with the explicit intent to conceal a contrary underlying reality. These groups have asymmetrical access to resources and information, crafting deceptive (or fraudulent) messages where they stand uniquely positioned to reap enormous financial and political gains. All based on half-truths or overt lies.

    In the interest of brevity, I’ll wrap up. I know I’m largely speaking to the choir, but if you’re interested in seeing evidence, have a look at these sources:

    1) PBS’s “The Persuaders”: see Segment 4: ‘The Science of Selling’ for the interview with Frank Luntz
    http://www.pbs.org/wgbh/pages/frontline/video/flv/generic.html?s=frol02p74&continuous=1

    Text of Luntz interview
    http://www.pbs.org/wgbh/pages/frontline/shows/persuaders/interviews/luntz.html

    2) Linguist George Lakoff’s book, “Don’t Think of an Elephant!”
    http://www.amazon.com/Dont-Think-Elephant-Democrats-Progressives/dp/1931498822/

    ~B-I-M

  22. formerlawyer says:

    These were on the first site I googled:

    Reality, It’s Not What You Think!
    https://www.bumperart.com/ProductDetails.aspx?SKU=2004072304&productID=5724

    Don’t believe everything you think
    https://www.bumperart.com/ProductDetails.aspx?SKU=2004011468&productID=788

    Better to understand a little than to misunderstand a lot
    https://www.bumperart.com/ProductDetails.aspx?SKU=2004011356&productID=676

    When all else fails, manipulate the data!
    https://www.bumperart.com/ProductDetails.aspx?SKU=2004012446&productID=1766

    One of my personal favourites (NSFW)
    https://www.bumperart.com/ProductDetails.aspx?SKU=2011021901&productID=136798

  23. alnval says:

    Thanks for the post. Where else would one find a discussion of cause and effect except at TBP?

    I didn’t know of Michotte but your description of his work reminded me of Piaget on cause and effect in children and of the work of the turn-of-the-20th century psychologist Edward Titchener at Cornell who studied the structure of the mind. Both men made significant contributions to understanding how we see/perceive the world and how, as a result, we generate the attributions that allow us to explain who we are, how we do things and, perhaps, why we do them. Applying Titchener’s concept of the “stimulus error”, for example, is fundamental in keeping us from jumping to conclusions as we try to explain the world around us.

    It’s instructive to remember that these guys were early and effective exploiters of the mind/brain as a “black box” that took stuff in, processed it, and then sent stuff out; better known today as “gigo.” For them it was enough that this approach permitted them to make reliable and valid generalizations about how humans functioned based on controlled observations of human behavior. For them, the brain was a physiological “constant.” Something that was necessary but, at a practical level, unmeasurable and therefore unknowable. In this framework, individual differences were totaled and averaged but could not be explained.

    I’m not convinced that today’s emphasis on using the MRI and CAT-Scan to discover how and where behavior is really produced in the anatomical structure called the brain will be more helpful. I don’t believe that this approach, any more than that of the “black box,” will allow us to develop general principles of human behavior that explain individual differences. Or, bottom line, that it would improve our ability beyond what we already know as to how to avoid “. . . expensive cognitive errors.”

  24. Francisco Bandres de Abarca says:

    A more prominent cognitive malfunction is the understandable desire to attain certainty, once a degree of causation is derived. We establish a historicity of linking an observable state and noting an observable outcome, and the eventually predictable outcome is what we call ‘probability’. A cognitive error, then, is to link that probability to future outcomes as a certainty, overlooking or ignoring the potential of future intervening factors and just the plain ol’ reality of randomness and chaos.

    There will always be a gulf between knowledge and predictive certainty. There is no absolute linkage to the future.

    And Einstein was correct. God does not play dice. God has no need for it.

    And we should learn, when we attempt to presume too much, an important bit of insight–Men make poor gods.

  25. zell says:

    Think Tanks are Tanks of Thought. The thoughts are already imbedded, while the humming sound of thought you hear is the process of looms craftily fabricating rugs of deception to cover the bare floor of facts which B.R. has so often innumerated.
    If you want to go somewhere, Think Tanks will provide you with the Magic Carpet.
    When are you ever surprised by the conclusions of the House propagandists? Why they’re so good they can fool themselves. Tanks of Kool Aid. That’s the tell!

  26. Tim says:

    Here’s a fantastic article from Wired Magazine on examples of the errors of causative thinking:
    http://www.wired.com/magazine/2011/12/ff_causation/all/1

    ~~~

    BR: Um, Tim, you seem to have discovered a brand new cognitive error yourself.

  27. Arequipa01 says:

    In Book II, Ch. XXIX of Don Quijote, Quijote boards a rowboat (la barca encantada) to set off for distant lands and as it drifts it to the river’s current, he launches into a delirious harangue exalting the utility of Ptolemaic astronomy in orienting themselves in their journey. Long story short, trip ends in disaster as the river’s current pulls their boat into the waterwheel of a mill; the boat is smashed to pieces and the two, Quijote and Panza are nearly drowned.

    http://www.classicreader.com/book/1148/86/

    More or less at the time when this was written Galileo contentions regarding a heliocentric description of the solar system/universe was underway and the suppression of any printed material countering Church teaching would not make past the ecclesiastical censors. Cervantes cleverly masked his view of the ptolemaic system is this episode and graphically depicted the consequences of ordering one’s actions around a deeply system of thought/paradigm. Seems to me that some parallels between EMH and Geocentrism are identifiable.

  28. blackjaquekerouac says:

    don’t know who ToNYC is…but you’re my kind a guy. Let me sum for you what’s really going on: “I don’t know what pornography is…but i know it when i see it.” Just replace the word “pornography” with “torture” and you wind up with wothless pschyo’s like Barry phuckin’ Ritholtz. You phuckin clowns are DEAD…kapiche! You’ve screwed so much real money at this point your only hope is JOIN UP AND ANNIHILATE TEHRAN. So STICK THAT IN YOUR CAUSE AND EFFECT PIPE AND SMOKE BITCHEZ!

  29. leveut says:

    Oh. Let me point out

    quote: “Though scientists constantly remind themselves that mere correlation is not causation, if a correlation is clear and consistent, then they typically assume a cause has been found—that there really is some invisible association between the measurements.”

    Proprietor: In other words, yes, we can figure out actual causation.

    No, that is not what it says, in words, or in other words.

    *Assuming* there is a cause does not mean that there is a cause, nor that the thing that they have assumed is the cause actually is the cause. And, science is not much similar to the social “sciences”, including economics.

  30. leveut

    That is what I said, not the article.

    Its not magic, things are not incanted into being — where there is a cause, we can determine it; And where there is no cause — just a random outcome — we should be able to deduce that as well!

  31. leveut says:

    1. It is always amusing, frequently hilarious, how the inmates of Ritholtzia seem to believe others are subject to mistakes in facts, thinking, belief, ideology, and reasoning, but they are not.

    2. For those who are not inmates of Ritholtzia, the book by Kahneman, Thinking, Fast and Slow, is very interesting.

  32. Due to whatever reason, leveut — confirmation bias? — you are misreading this.

    I wrote:

    For the rest of us, there is self-enlightenment. If we develop some awareness of these analytical errors, or our cognitive foibles, we can at least stand a fighting chance to go beyond erroneous perceptions towards truer understanding:

    That stand in opposite to your comments. A fair reading of that would be:

    1. Everyone suffers from the cognitive deficits caused by our wetware.
    2. If you are aware of it, you can compensate/anticipate/prevent the effects from hurting your portfolio (too much).
    3. Being aware of these things is an ongoing process of self reflection and thought.

    PS: Thinking Fast and Slow is already in my queue and was reviewed here

  33. Francisco Bandres de Abarca says:

    A brief addition to the conversation . . .

    A good book germane to this topic–Karl Popper’s “The Logic of Scientific Discovery”.

  34. Ridge Runner says:

    Unlike some observers, I have trouble reading other people’s minds, so I have no information suitable for probing Pinto’s and Walliser’s deeper motives. I have enough of a challenge trying to plumb my own motives most of the time.

    However, having been in the middle of their world of residential mortgage finance analysis for a couple of decades, I can ponder where they are going off the track in their narrative. There is plenty of evidence that the GSE’s and their managers, together with accomplices in the political sphere and in the capital markets spent the last couple of decades fashioning a marvelous set of burglary tools for fleecing investors and encumbering borrowers in unsustainable debt. The fact that applying these tools could only end badly, trashing both housing markets and the financial system as a whole, was incidental to those who discovered how to exploit the tools successfully for an extended period of time, suppressing the ‘traffic cops on the capital conduit freeway’ long enough to ply their trade for most of a decade, and finally conning Congress into bailing out their institutions long enough for them to successfully make off with their plunder.

    Foundational to this tool kit has been the narrative of the blessings of home-ownership, and the magical benefits it confers on individual households and communities, providing a convenient hook for a variety of pernicious policies and programs that magically transform the reality of high-cost debt slavery into a faux state of blessed home-ownership. This scam was well-exposed in Josh Rosner’s insightful 2001 study ” Housing In the New Millennium: A Home Without Equity Is Just a Rental With Debt” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1162456

    As the various interests (home builders, realtors, mortgage bankers, “community organizers”, Congress members and presidents seeking re-election) concerned with funneling capital into residential construction and buying the votes of inhabitants of the liberal plantation pushed the boundaries of applicability of the mundane Mortgage Backed Security to justify relaxation of underwriting standards, and imposition of ever-broader mandates to ‘serve under-served’ borrowers, a generation of corporate sociopaths who saw predatory lending as a perfectly justifiable mechanism for making their pile saw their opportunity, and they took it (from GSE CEO’s like Jim Johnson and Franklin Raines to the Investment Banksters like Lehman, Bear Stearns et al to the executives of mortgage giants like Countrywide and WaMu).

    Where Pinto and Walliser err is in their fixation on those who initially fashioned the burglary tools, and their apparent blindness to the culpability of those honchos of “private enterprises”, the direct beneficiaries of crony-capitalism, who grabbed these tools and exploited them to the max. There are plenty of candidates for berths along Bernie Madoff’s cell block from both groups. Whether the current political order can find a way to ‘elect’ enough of these candidates to at least a few years of breaking rocks and participating in highway road cleanup teams will determine its ultimate survivability. At the moment, the upcoming election cycle resembles a vote by passengers for the next captain of the Titanic, after its collision with the iceberg. The current captain has been dithering for three years, but I’m not sure that it really matters who the captain is post-2012. All the “electable” candidates (i.e., not Ron Paul) are unlikely to disturb the sleep of the so-far successful bankster class.

  35. Ridge Runner says:

    @Francisco Bandres de Abarca

    “And we should learn, when we attempt to presume too much, an important bit of insight–Men make poor gods.”

    Indeed.

  36. gordonq says:

    I actually read the “wired” article. I wonder if the most politically motivated commentors did not. Folks should be amazed at the complexity of the biological systems that the pure genius of evolution has produced. Why do many balk at giving much credit for the evolutionary software in the brain? I suspect that some folks just bristle when they see other’s software not agreeing with their own. Perhaps a “character” problem?

  37. gordonq says:

    I would add that modern medicine doesn’t concern itself much with causation, but with just treating symptoms. Rather than stressing healthful living habits, it pursues the elimination of symptoms like runny noses, sleeplessness, and aches and pains. There’s good money in this approach. If things didn’t break, well, where’s the money in that?

  38. InterestedObserver says:

    @Barry – “Its not magic, things are not incanted into being — where there is a cause, we can determine it; And where there is no cause — just a random outcome — we should be able to deduce that as well!”

    Barry – I’d step a bit back from that. You need to approach this from the direction of falsifiability.

    Ultimately, we view everything through the lens of some model. If the data is inconsistent with the predictions of that model, OK, the model is wrong as posed. However, if the data is consistent with the model, you still haven’t proven that model correct. You’ve shown that it’s not inconsistent with the data examined thus far (i.e. it’s not shown to be wrong yet…). This difference may seem a minor semantic quibble, but it’s not.

  39. McMike says:

    At the risk of oversimplification, perhaps Mr. Market is to the economics religion as Mother Nature is to Religious religion.

  40. Bob Lince says:

    Ouch! But am betting Hume will survive the qualification.

    Here’s one for sure thing Hume has over BR: Hume understands the meaning of the phrase “to beg the question” and BR has shown he doesn’t.

  41. MinnItMan says:

    In my experience – my reading and interpretation of Plato, for example, as a “simplification” – useful philosophical discussions have two necessities, the absence of either one generally guarantees either an ideological or merely rhetorical outcome.

    1) The participants have to be “smart enough.” By this, I don’t mean they need 180 IQs, Ivy League degrees or the ability the solve a Rubik’s Cube in less than a minute. They do, however, need to “believe” that logic matters, that conclusions derived from “sound” arguments hold a certain place, that fallacies should not be persuasive, and that “reasoning” can be very tricky.

    2) The participants have to have a psychological openness and sturdiness, that they are not so egocentric that they can “handle the truth” when it challenges (or obliterates) important vested interests, that they don’t let frustration get the better of them, get pissed and “kick the table over.”

    I would add that the discussion usually also has some highly desirable background characteristics: the participants have more than one area relatively deep experience, accumulated observation and diverse “book learnin,’”* yet don’t rely (or over-rely) on using analogy as a first resort in learning anything new.

    *SNIP*

    Another somewhat random thought on Hume is that I recently watched the “Princess Bride” with my three kids. I’ve seen it a half dozen times and they had seen it a few as well, but we were killing time on vacation, and it is a great movie to re-watch. My oldest kid had mentioned that he had been reading a little Hume for a high school intro philosophy class and I had just had a discussion with my dad – an extremely gifted electrical engineer – who has become an extreme pain-in-the-ass dogmatic Christian in his old age. He had insisted on the necessity of belief in the resurrection as the sine non qua of Christianity. Then, I see the scene with Billy Crystal as Miracle Max explaining the difference and significance between “mostly dead” and “completely dead.” It is a pretty compelling dramatic rendering of a key argument in Hume’s Treatise on Natural Religion and some of the historical implications.

    That is all.

  42. bear_in_mind says:

    There’s no disagreement that causation in complex biological systems is acutely multi-factorial. This makes attribution of causation challenging (maybe even ‘provisional’ in nature), but it does not render crucial inferences inaccurate or invalid.

    What I find problematic about Hume’s perspectives (as cited by Mr. Lehrer) is the invitation to relativism regarding all matters of knowledge. Intellectual honesty requires open-mindedness, but not an abdication of discrimination and reason. Yet, it’s the rise of this latter impulse, to increasingly impose ideology (i.e. “rational egoism” and “laissez-faire capitalism”) absent rigorous rational measurement, that has unduly distorted popular discourse in consideration of regulation and our financial markets.

    The extreme disproportionality of societal costs/benefits accruing to these distortions cannot be ignored. Whether they’re causal in nature is really a secondary concern. What does matter is seeing “what is” and making the necessary course-corrections.

  43. bear_in_mind says:

    A bit more grist for the mill… on today’s edition of “To The Best of Our Knowledge”, the show focuses upon ‘Thinking on Thinking’, with guests Daniel Kahneman; Duncan Watts; Cathy N. Davidson; and Jennifer Ratner-Rosenhagen.

    SOURCE: http://ttbook.org/book/thinking-about-thinking

  44. Frilton Miedman says:

    Presuming the article is posted on a financial blog to relate the often erroneous assumptive link between causation and correlation in capital markets/economics, I’ll just say this, as it relates to the assumptions made by Pfizer -

    Though we constantly hear about the great success of Reaganomics, the extreme economic growth over the last few decades, the quality of life – no one, at least no one with “credentials” on the pro-Reagan camp noticed the obvious.

    Consumer and government debt was accelerating at a substantially faster pace than it had been pre-Reagan.

    Worse yet, continued assumptions that we can somehow make a comeback if we just keep going the same route.

    Heritage Foundation et al = Voodoo economics that just so happens to coincide with it’s corporate sponsors agenda….every bit as much as Pfizer’s findings coincided with it’s agenda.

    “They only see what they want to see…”

  45. DeDude says:

    I don’t think our brains are build to understand interconnected systems of multi-variate systems with rules that are content dependent and change with time. Linear paradigms where A causes B causes C are so much easier to understand – so that’s usually what we choose to believe in.

  46. ToNYC says:

    Epicurus and Democrites had this all figured out, except for the soiled sheets and other process details, three Centuries B.C.E. Hume and that phat renaissance lot were 2.0. A rebbot has been in order to 1.0 on the Eastern shores of Sicily won by Greeks at that Time including a few wise-ass, questioning authority types that kick-started what still could be an information-sharing rather than information-arbitrage culture. At least between folks that don’t put a price on fun and love and self.

  47. bear_in_mind says:

    @Frilton Miedman: Point generally taken about the Reaganomics crowd, with the possible exception of former Director of the OMB (1981-85), David Stockman. In the last couple years, Stockman has become quite vocal in opposition to his party’s current approach to tax policies and revenues.

    It should be noted that after leaving government, Stockman dabbled in high finance for many years before the high-profile implosion of one of his firm’s investments drew the wrath of the SEC and US Attorney’s Office in 2007. Of course, criminal prosecution wasn’t pursued, but cannot help ponder if there’s a correlation between the timing of these events and his public distancing from Reagan’s fiscal legacy.

  48. Era says:

    Very nice post!

    “Cause and effect” can also be used as propaganda to promote a particular course of action. Here is an example:

    Say a population is free of disease A. Then industrial pollutant X enters the environment of this population and 1% contract disease A over time. A genetic study is done and a strong correlation is discovered between gene G and disease A.

    Pharmaceutical companies then claim “we have found the cause of disease A, it is GENETIC and the cause is gene G”. On the basis of this claim, they go on to develop drug D that effectively negates the function of gene G and promote this drug as the cure. Since gene G carried out a particular function in the body, drug D has toxic side-effects resulting from the loss of function of gene G.

    Meanwhile, alert citizens notice a strong correlation between pollutant X and disease A, and claim “disease A is POISONING caused by pollutant X”. Pharmaceutical companies spend huge amounts of money on media stories saying that the theory that pollutant X causes disease A has been thoroughly discredited, in order to protect their profits from drug D. (They are joined by the industry that created pollutant X which wants protection from lawsuits.)

    Notice how the questions of whether pollutant X is the cause, or whether gene G is the cause, are misleading, since the disease is in fact the result of an interaction between X and G. However, if you want to advocate for selling pharmaceuticals, you claim gene G is “the cause”, whereas if you want to advocate for cleaning up the environment, you claim pollutant X is “the cause”.

    (Apologies for the biased example, maybe you can think of better ones)

  49. [...] exposition on this issue, but as I get the chance I will shoot out various notes. Barry Ritholtz gives me such a chance. In other words, yes, we can figure out actual [...]

  50. AHodge says:

    Nice brain stretch made me notice these from my habit of weekend FT
    QUOTE Einstein admitted to having spent a hundred times longer thinking about quantum physics than his theory of relativity and believed there was “a real world existing independently of perception”. Bohr, meanwhile, maintained that there was no objective reality but only an “abstract quantum description”.UNQUOTE
    Both these two jokers sound a lot like hume, but even more discouraging esp Bohr…
    Also from FT mind your language
    QUOTE Where does the word “probably” come from? From the Latin probabilis, which meant “could be proved by experiment”. “But probabilis got overused,” Forsyth writes. “People are always more certain of things than they really should be, and that applied to the Romans just as much as to us. Roman lawyers would claim that their case was probabilis, when it. So by 1387 (English) it was already a poor, exhausted word whose best days were behind it and only meant likely.”UNQUOTE

    But thinking too much like this you ll end up in bed with the covers over your head.
    Science is correlation, then tentative hypothesis.
    Boyles law or gravity might disappear tomorrow but unlikely….
    Observed economic behavior especially markets could and does change all the time.
    The basis of wisdom,
    in this created by the investor weirdness,
    is don’t assume too much, or anything
    As for what you might want to assume in life, you could go with Hubs speech from secondhand lions

    “Sometimes the things that may or may not be true are the things a man needs to believe in the most. That people are basically good. That honour, courage, and virtue mean everything; that power and money, money and power mean nothing. That good always triumphs over evil. And I want you to remember this… that love… true love never dies! Remember that boy, remember that. Doesn’t matter if it is true or not, a man should believe in those things, because those are the things worth believing in. Got that?”
    Got that?
    But I don’t recommend this for financial markets, where you never assume you know anything…

  51. AHodge says:

    Some deductive reasoning can supply absolute proofs even in economics or markets
    identities and timing are two..
    for example if i say
    in 1930, the 8.6 % decline in real GDP was 60.8% “caused” by Fixed Investment
    this does not answer why GFI declined, or you believe the #
    but is irrefutably reasoned as the sum.
    if i look at monthly data in the summer of 2008
    and monthly and week ly data clearly shows the US heading into a maxi recession
    then Lehman going bankrupt Sept 15 could not possibly have caused that.