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Jishnu Das's avatar

What a great post!

It is something I have been thinking about a bit since reading the work on the Fragile Families. I had two thoughts, both from streams that I am exploring.

One is that economic theory often builds models that predict a lack of predictability. A classic case is movements in stock prices, since any predictable movement allows for a money pump and should be arbitraged out. But more subtly, our models of how people consume also imply unpredictability in innovations in consumption, under the assumption that utility is concave in consumption, so we want to use all future known information, prices and income to smooth our consumption from one period to another. So, unpredictability in consumption innovations is actually a test of full insurance (& concave utility and all the other stuff we already assume). I wonder whether that approach of using the theory to provide a bound on predictability is important precisely because it can provide a test of the theory, appropriately formulated.

A second is that there are places where there are massive gains to improving empirical predictability around social questions, so that the kind of Fragile family exercise could perhaps be expanded to saying that our current ability to predict Y from X is low, and if you could find a new set of variables that could better predict Y, we would be much better off. A great example is our ability to predict how good teachers are based on everything we observe about them, which typically has R-squares of 5% of less. If we could find some attributes that we can screen on, we would all be much smarter, I think.

These are active areas of research for us, so would be great to get your thoughts!

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Sophie Wang's avatar

Great post!

How strong would you say that empirical results need to be to argue unpredictability arguments? This seems like a problem of universality vs. existentialism. "Y is not predictable from X" is a problem of universality (for all methods M, Y is not predictable from X) whereas "Y is predictable from X" (there exists a method M s.t. Y is predictable from X) is a problem of existentialism. The latter is much easier to show, and the former has been the crux of various open problems.

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