Algorithms Can't Pick College Football Champions or Predict Economies

December 6, 2010

A mathematical formula cannot tell us what the U.S. economy (or any other economy) is going to do next year; nor can an algorithm tell us exactly how much revenue a new tax will collect, no matter what the Congressional Budget Office and Paul Krugman tell us, says William L. Anderson, an associate professor of economics at Frostburg State University.

There are legitimate reasons that using math in the way economists currently use it will result in failure.

  • The first is that our economic future is not based on risk for which there can be understood probabilities.
  • The second reason is that economists cannot place entrepreneurial insight into an equation -- entrepreneurship is not quantifiable; one cannot subject it to probabilities or mathematical rigidity.

For example, laws of probability could not tell us that two college dropouts would invent a personal computer, build it in a garage and then have the entrepreneurial vision to turn that invention into a line of products under the name Apple, says Anderson.

There are legitimate reasons why no mathematical economist could have foreseen Apple.  An algorithm can be based only on what we already know and by definition cannot deal with uncertainty.

The popular 1960s cartoon The Jetsons featured futuristic home computers that looked like, well, 1960s mainframes.  The creators could not have envisioned what actually would exist just a few decades later, not hundreds of years in the future.  Likewise, the algorithm, although useful in building rockets and bridges, cannot tell us what we need to know in economic analysis, says Anderson.

Source: William L. Anderson, "Algorithms Can't Pick College Football Champions or Predict Economies," Freeman Online, December 1, 2010.

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