Cricket (again) and Rational Expectations

On the subject of Sir Mix-a-Lot, when I was on holiday in the US a couple of months ago, I caught an episode of Who wants to be a Millionaire. For $500, the question was: Which of these musicians was not knighted by the Queen: A) Sir Elton John B) Sir Mick Jagger C) Sir Paul McCartney or D) Sir Mix-a-Lot. The contestant didn't even consult the audience, immediately giving her answer as B)
Sir Mick Jagger...

This is a quote from a cricket fan from the Test Match Special inbox on the BBC live text service cricket commentary during the last test match between India and England (a bore draw resulting in a series win for India).

Following on from "Cricket versus Baseball as an Engine of Growth", this quote is a fascinating insight into cricket and explains why it is unsuitable as an engine of growth to back up the empirical research on this issue. Whilst equivalent football discussion boards are full of vitriolic anger directed at the England manager and any player who hasn’t been outstanding for 90 minutes of every England match for the last 5 years, the official BBC live text commentary is full of running jokes and light-hearted banter. We’re mediocre at both sports so that doesn’t really explain the difference, so my best explanation is that cricket is an inherently chilled out Summer game in which at any given time only about 3 of the 22 players are actually doing anything much (unless you include fielding). Being so chilled out, those that play it tend to end up laid back to the point where we even saw our national vice-captain almost drown during the World Cup due to being too drunk to carefully man his pedalo at 3am in the morning less than 48 hours before a match.

More importantly though, this quote reminds me of an area of economics I'm not particularly comfortable with, which is that a lot of economic models seem to assume individuals are much brighter and more knowledgeable than they probably are.

Unfortunately, economics is a difficult subject involving a tricky mix of various branches of maths (lots of calculus, matrix algebra & stats), verbal skills, and the need for well-rounded knowledge and analytical skills to make sure you’re not missing something crucial on an issue (yet we all still often do). It’s also a subject dominated by heavyweight universities like Harvard & MIT and in which most major breakthroughs seem to come from an elite bunch of genius academics.

So it’s little wonder that the individuals driving the subject forward massively over-estimate the ability of most of the population. The average economics Nobel Prize winner probably doesn’t know many regular folk, spending most of their time with other highly intelligent academics and this selection bias leads them to build models where the core agents are like themselves, i.e. rational agents who build forward-looking expectations consistent with structural models of the economy whilst factoring in all knowable information.

I think we can be fairly confident that the basics still apply to our empty-handed Millionaire contestant, e.g. if you charge more for a good they want less of it, bundles of average amounts of products are preferred to extremes, etc. However, many economic models go further, e.g. with agents forming forward-looking expectations consistent with the structural parameters of the economy, or agents being able to act optimally in infinitely repeated games with uncertainty, so even if this accurately models all economists, how realistic is this across a full cross-section of society?

by Indifference Merv | Saturday, September 01, 2007
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  1. Gabriel M. Says:

    But it's better in the aggregate, no? You can arbitrage other people's stupidity. :-)

    Also, I wouldn't go with the Superman description for all teachers at top US schools. There are geniuses but some of those people would say, as late as the mid '80s that the USSR will out-perform the US and other equally weird claims. :-)