Tom Pepinsky

Category: Politics

  • Another Reason why Predicting Financial Crises is Hard

    I have a new paper with Christopher Gandrud on prediction and financial crises. The genesis of the paper lies in the debate about why the Global Financial Crisis caught so many people, especially social scientists, by surprise. One argument is that social scientists are stupid and/or naive, or worse, that they were just cheerleaders for finance. Another argument is that crises are just unpredictable, period; indeed, if the efficient market hypothesis is valid then price movements, even large ones, should be unknowable ex ante.

    Without denying either of those possibilities (speaking for myself at least), we are interested in a different argument, which is that financial crises are unpredictable because they are subject to self-fulfilling dynamics. Our paper shows how to model a situation in which market actors play a coordination game with private information about their “strength” or risk tolerance. Crises emerge when players both sell an asset, and both strictly prefer to hold the asset when their counterpart holds too. We ask, given that there is not a crisis in the present, what can we infer about whether a crisis will happen in the future? The model generates a novel prediction: that the better economic conditions are in the present, the less we know about the likelihood of financial crises in the future. Looking at a new dataset that Christopher and Mark Hallerberg collected, we find that the data bear out this prediction.

    We see our argument as complementing Timur Kuran‘s work on “preference falsification,” which also shows how a simple model of social interactions explains why it should be hard to predict things like revolutions, uprisings, and crises. It also allows us to relate prediction problems to “epistemic uncertainty” (in a Knightian sense) in a single framework. There are also implications for what regulators ought to do if they want to minimize the threat of crises: learn more about market participants’ ability to withstand negative shocks. Stress tests, for example, are one way to do this.

  • This Just In: A Political Commentator is Wrong about Political Science

    Via Henry Farrell at the Monkey Cage, I came across an essay in the Weekly Standard entitled “Is Political Science Dying.” Stephen Hayward, a visiting fellow at Pepperdine Law School, makes the case that political science is too divorced from politics, too mathematical, too model-based and abstract. The motivating observation is a good one: given massive interest in contemporary politics, why aren’t students flocking to political science?

    one reason is that the fundamental questions of justice have either gone missing from most political science curricula, or more often are only anemically discussed. This is the plague of the social sciences, where issues of justice are reduced to the category of “normative” questions, which, being subjective, are not treated seriously. They are not even much discussed in many classes. It might be more accurate to call them the “anti-social sciences.”

    Farrell takes him to task on the evidence that he brings to bear: there’s not a lot of evidence that declining enrollments at Stanford are representative of the discipline, his sample of anecdotes is skewed, and there are plenty of other good explanations (like the collapse of the legal job market) that might explain the same trend.

    One might also wonder what exactly a political commentator with a PhD in American studies who teaches(?) at a law school knows about what happens inside of the undergraduate political science classroom. Or puzzle at the claim that students “flock to radical courses.” Our humanities friends would be delighted if this were true.

    Those points aside, here is another view.* What if the problem is that political science as taught isn’t technical enough?

    Here is how this argument would work. College students understand (albeit imperfectly) the labor markets that they face upon graduation. College is expensive, loans are burdensome. This creates an incentive to obtain skills in college. Model-based disciplines that teach abstract thinking in a technical framework have the benefit of conveying the perception that there are skills to be learned, and that those skills are marketable in the knowledge economy. The issue with faculty such as me is that we keep prattling on about justice on the anniversary of the Indonesian killings, and students think they need to develop some hard skills. We should to be giving them courses with titles like Strategic Thinking and Non-Market Strategy in Asia, and exposing them to coding, data management, and analytics.

    I can’t test this argument in a way that Henry Farrell (or I) would prefer, not in a way that supports a causal argument. But I can give impressionistic evidence, in the form of three questions.

    1. Do we live in a higher education landscape where technical training (STEM, etc.) is viewed as legitimately and self-evidently the route to both individual career success and national prosperity?
    2. Is economics collapsing in enrollment?
    3. Are the critical humanities rising in enrollment?

    If the answer to these three questions is YES-NO-NO, then Hayward is, plausibly, exactly wrong about political science. It’s not proof, and I am in no means in favor of actually turning political science into economics. But it might help us to diagnose exactly why Hayward has the impression that political science is in trouble.

    NOTE

    * This view is by no means representative of the department where I teach, or of my employer.