GLS Shackle, imagined and deemed possible?

Background

This is a personal view of GLS Shackle’s uncertainty. Having previously used Keynes’ approach to identify possible failure modes in systems, including financial systems (in the run-up to the collapse of the tech bubble), I became concerned  in 2007 that there was another bubble with a potential for a Keynes-type  25% drop in equities, constituting a ‘crisis’. In discussions with government advisers I first came across Shackle. The differences between him and Keynes were emphasised. I tried, but failed to make sense of Shackle, so that I could form my own view, but failed. Unfinished business.

Since the crash of 2008 there have been various attempts to compare and contrast Shackle and Keynes, and others. Here I imagine a solution to the conundrum which I deem possible: unless you know different?

Imagined Shackle

Technically, Shackle seems to focus on the wickeder aspects of uncertainty, to seek to explain them and their significance to economists and politicians, and to advise on how to deal with them. Keynes provides a more academic view, covering all kinds of uncertainty, contrasting tame probabilities with wicked uncertainties, helping us to understand both in a language that is better placed to survive the passage of time and the interpretation by a wider – if more technically aware – audience.

Politically, Shackle lacks the baggage of Lord Keynes, whose image has been tarnished by the misuse of the term ‘Keynesian’. (Like Keynes, I am not a Keynesian.)

Conventional probability theory would make sense if the world was a complicated randomizing machine, so that one has ‘the law of large numbers’: that in the long run particular events will tend to occur with some characteristic, stable, frequency. Thus in principle it would be possible to learn the frequency of events, such that reasonably rare events would be about as rare as we expect them to be. Taleb has pointed out that we can never learn the frequencies of very rare events, and that this is a technical flaw in many accounts of probability theory, which fail to point this out. But Keynes and Shackle have more radical concerns.

If we think of the world as a complicated randomizing machine, then as in Whitehead, it is one which can suddenly change. Shackle’s approach, in so far as I understand it, is to be open to the possibility of a change, recognize when the evidence of a change is overwhelming, and to react to it. This is an important difference for the conventional approach, in which all inference is done on the assumptions that the machine is known. Any evidence that it may have change is simply normalised away. Shackle’s approach is clearly superior in all those situations where substantive change can occur.

Shackle terms decisions about a possibly changing world ‘critical’. He makes the point that the application of a predetermined strategy or habit is not a decision proper: all ‘real’ decisions are critical in that they make a lasting difference to the situation. Thus one has strategies for situations that one expects to repeat, and makes decisions about situations that one is trying to ‘move on’. This seems a useful distinction.

Shackle’s approach to critical decisions is to imagine potential changes to new behaviours, to assess them and then to choose between those deemed possible. This is based on preference not expected utility, because ‘probability’ does not make sense. He gives an example of  a French guard at the time of the revolution who can either give access to a key prisoner or not. He expects to lose his life if he makes the wrong decision, depending on whether the revolution succeeds or not. A conventional approach would be based on the realisation that most attempted revolutions fail. But his choice may have a big impact on whether or not the revolution succeeds. So Shackle advocates imagining the two possible outcomes and their impact on him, and then making a choice. This seems reasonable. The situation is one of choice, not probability.

Keynes can support Shackle’s reasoning. But he also supports other types of wicked uncertainty. Firstly, it is not always the case that a change is ‘out of the blue’. One may not be able to predict when the change will come, but it is sometimes possible to see that there is an economic bubble, and the French guard probably had some indications that he was living in extraordinary times. Thus Keynes goes beyond Shackle’s pragmatism.

In reality, there is no strict dualism between probabilistic behaviour and chaos, between probability and Shackle’s complete ignorance. There are regions in-between that Keynes helps explore. For example, the French guard is not faced with a strictly probabilistic situation, but could usefully think in terms of probabilities conditioned on his actions. In economics, one might usefully think of outcomes as conditioned on the survival of conventions and institutions (October 2011).

I also have a clearer view why consideration of Shackle led to the rise in behavioural economics: if one is ‘being open’ and ‘imagining’ then psychology is clearly important. On the other hand, much of behavioral economics seems to use conventional rationality as some form of ‘gold standard’ for reasoning under uncertainty, and to consider departures from it as a ‘bias’.  But then I don’t understand that either!

Addendum

(Feb 2012, after Blue’s comments.)

I have often noticed that decision-takers and their advisers have different views about how to tackle uncertainty, with decision-takers focusing on the non-probabilistic aspects while their advisers (e.g. scientists or at least scientifically trained) tend to, and may even insist on, treating the problem probabilistically, and hence have radically different approaches to problem-solving. Perhaps the situation is crucial for the decision-taker, but routine for the adviser? (‘The agency problem.’) (Econophysics seems to suffer from this.)

I can see how Shackle had much that was potentially helpful in the run-up to the financial crash. But it seems to me no surprise that the neoclassical mainstream was unmoved by it. They didn’t regard the situation as crucial, and didn’t imagine or deem possible a crash. Unless anyone knows different, there seems to be nothing in Shackle’s key ideas that provide as explicit a warning as Keynes. While Shackle was more acceptable that Keynes (lacking the ‘Keynesian’ label) he also still seems less to the point. One needs both together.

See Also

Prigogine , who provides models of systems that can suddenly change ‘become’. He also  relates to Shackle’s discussion on how making decisions relates to the notion of ‘time’.

Dave Marsay

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About Dave Marsay
Mathematician with an interest in 'good' reasoning.

6 Responses to GLS Shackle, imagined and deemed possible?

  1. Pingback: Fat tails and Epochs « djmarsay

  2. Blue Aurora says:

    Dr. Marsay, have you ever read Carlo Zappia and Marcelo Basili’s article in the Cambridge Journal of Economics on Daniel Ellsberg and G.L.S. Shackle? It contains a model for Shackle’s decision theory.

    http://cje.oxfordjournals.org/content/34/3/449.short

    • Dave Marsay says:

      Thanks. I had glanced at the conclusion of http://www.econ-pol.unisi.it/quaderni/460.pdf and not been inspired. Reading it now, though, I got more of a feel for Shackle. But they don’t really seem to pick up on Shackle’s notion of a ‘critical’ decision being one where you might change the course of history. Instead they seem to pick up on the notion of decision-making using a particular level of detail and then occasionally finding that one needs more. This is contrasted with the Keynesian concern with big tides of history that might sweep over one. We need to consider all of these.

      Shackle’s French guard examples seems good. Thanks for your comment.

  3. Blue Aurora says:

    You’re welcome, Dr. Marsay. Out of curiosity, what do you think of the Post Keynesian school of thought? I think that they’ve produced *some* interesting stuff (IMO, the best being Hyman Minsky’s “Financial Instability Hypothesis”, which synthesizes concepts from Irving Fisher, John Maynard Keynes, and Joseph A. Schumpeter), but otherwise, I find them to be somewhat questionable at times.

    Also, what do you make of the econophysicists who publish in “Physica A: Statistical Mechanics and Its Applications”? Some of their stuff (e.g., detrended fluctuation analysis and multi-fractality of market prices) seems quite promising. Have you read any books by econophysicists like Joseph L. McCauley?

    Finally, would it be possible for me to e-mail you?

    I hope you don’t mind the barrage of questions!

    • Dave Marsay says:

      Blue, I have a somewhat cynical view that whenever there is an X-ian school of thought, such as Bayesian or Keynesian, it will be a gross distortion of X’s views. I wish that I understood how this comes to be.

      I do recall Minsky’s hypothesis, which seemed to be well regarded in the last two bubbles, but not forensic enough, and hence not very helpful to decision-makers. Reading it at http://www.levyinstitute.org/pubs/wp74.pdf it clearly identifies an important and well recognized mechanism, by which the perceived risk diminishes and investors increasingly chase after return by gambling (speculating). My example prior to the 2008 crash was ‘buy to let’. This was seen as a (good) hedge, but the economy seemed to be in or heading for a state where it had multiple equilibria, with buy to let being a ponzi in some. We were only in a good equilibrium because we thought we were in a good equilibrium. This (Keynesian) view is different from Minsky’s. How can we tell when our hedges can turn to Ponzis overnight? Can we avoid bubbles without strangling growth? (What actually happened was that the US had a problem first and that nice Mr Brown stabilised things. CDOs etc turned out not to be AAA hedges.)

      I agree that some of the econophysics is quite interesting, but what I have seen lacks any credible underpinning economic theory. It is mostly just chartism or linked to odd views. One needs a sound framework for going back and forwards between insights like MInsky’s and stats. They don’t seem quite there yet. Unless you can suggest something?

      I have emailed you separately.

      • Blue Aurora says:

        There is an article on Physica A which does model the “Financial Instability Hypothesis”. Here it is for your reference. It looks like a pretty solid model…

        http://www.sciencedirect.com/science/article/pii/S0378437111005292

        From what I’ve been able to gather, the econophysicists seem to have an ultra-empiricist/ultra-positivist philosophical underpinning. This doesn’t mean they are unreflective, however. There are published articles on methodology and theory in Physica A. Here’s an article on the relationship between econophysics and economic uncertainty, which might intrigue you.

        http://www.sciencedirect.com/science/article/pii/S0378437109005494

        I’m planning on reading Joseph L. McCauley’s “Dynamics of Markets” (there’s a second edition which came out not too long ago) to bolster my knowledge of econophysics.

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