Economic thinking. Deductive vs. Inductive methods to create economic ideas.

[jueco2005]

Economic thinking. Deductive vs. Inductive methods to create economic ideas.

Whether economists realize or not, we are divided into two main ways of thinking. Whether conciusly or not, we tend to use deductive learning or inductive learning.

I would like to ask you all which is better and way.

This is the root of all economic thinking.

Thank you.

 

[drsteph]

Inductive logic is the method of thinking which was used for most of the pre-enlightenment era. Much of this came from the catholic church dominated society, where thinkers were either educated by, or employed by, the church. As church dogma required the bible to the source of all wisdom, this provided the first principles for inductive logic. Reductio ad absurdum, you reach the ‘how many angels can dance on the head of a pin’ argument based upon how many verses the bible has, whatever. Inducing things from ‘first principles’ is where this type of logic heads.

Deductive logic relies upon the ‘scientific method’ to formulate conclusions. Carefully designed experiments are used to test hypotheses and prove or disprove them. As the science advances, the experiments become more complex and more difficult. Experimentation usually relies upon the isolation of ONE variable to allow for observation of a direct result due to the experiment. As science progresses and makes further analysis into complex systems, isolation of that ONE variable becomes more difficult. Furthermore, there is usually a diminishing return upon the science itself, as the easy relationships have largely been already discovered and a great deal of effort must go into designing the experiment correctly to isolate that one variable that has less of an effect upon the system globally.

Does any of this sound familiar to system writers and testers?

I believe that we are progressing in many ways, socially and scientifically, as a species down the road of deductive logic as dogma. Look at LEAN and Six Sigma modeling in business, Statistical arbitrage in trading, and the ever increasing importance of the legal system in our society (even though law is largely inductive through precedents, etc…)

However, there is room for inductive thinking in a deductive world, and it is that inductive (or creative, coming from first principles) thinking that produces great breakthroughs (which are later refined by deductive logic). Without new areas of inquiry to delve into (or more important, new breakthroughs that open up new work in that area of inquiry), deductive reasoning will simply grind on, finer and finer, with effort disproportionate to benefits gained.

Did that answer your question?

 

[jueco2005]

Quote from drsteph:

Inductive logic is the method of thinking which was used for most of the pre-enlightenment era. Much of this came from the catholic church dominated society, where thinkers were either educated by, or employed by, the church. As church dogma required the bible to the source of all wisdom, this provided the first principles for inductive logic. Reductio ad absurdum, you reach the ‘how many angels can dance on the head of a pin’ argument based upon how many verses the bible has, whatever. Inducing things from ‘first principles’ is where this type of logic heads.

Deductive logic relies upon the ‘scientific method’ to formulate conclusions. Carefully designed experiments are used to test hypotheses and prove or disprove them. As the science advances, the experiments become more complex and more difficult. Experimentation usually relies upon the isolation of ONE variable to allow for observation of a direct result due to the experiment. As science progresses and makes further analysis into complex systems, isolation of that ONE variable becomes more difficult. Furthermore, there is usually a diminishing return upon the science itself, as the easy relationships have largely been already discovered and a great deal of effort must go into designing the experiment correctly to isolate that one variable that has less of an effect upon the system globally.

Does any of this sound familiar to system writers and testers?

I believe that we are progressing in many ways, socially and scientifically, as a species down the road of deductive logic as dogma. Look at LEAN and Six Sigma modeling in business, Statistical arbitrage in trading, and the ever increasing importance of the legal system in our society (even though law is largely inductive through precedents, etc…)

However, there is room for inductive thinking in a deductive world, and it is that inductive (or creative, coming from first principles) thinking that produces great breakthroughs (which are later refined by deductive logic). Without new areas of inquiry to delve into (or more important, new breakthroughs that open up new work in that area of inquiry), deductive reasoning will simply grind on, finer and finer, with effort disproportionate to benefits gained.

Did that answer your question?

Thank you for your response. I dont have any particular question.

This is Just a debate. I dont expect this thread to be attractive to people around here since it requires deep thinking.

As far as your argument I think I understand things differently.

Inductive logic-used by mainstream economists trough their scientific method. Not the other way around.

Other more traditional schools like Austrian and maybe the Chicago guys, use deductive learning to draw conclusions and do not use the scientific method.

"The Austrian praxeological method is based on the heavy use of logical deduction from what they perceive to be self-evident axioms; undeniable facts about human existence. The primary axiom from which Austrian economists deduce further certain conclusions is the action axiom which holds that humans take conscious action toward chosen goals. The axiom actually affirms many other axioms such as existence, identity, consciousness, and free-will. Austrian economists recognize this but focus on action and say that it is undeniable because in order to deny action, one would have to employ action in the act of denial." FROM WIKIPEDIA

 

[morganist]

Quote from jueco2005:

Thank you for your response. I dont have any particular question.

This is Just a debate. I dont expect this thread to be attractive to people around here since it requires deep thinking.

As far as your argument I think I understand things differently.

Inductive logic-used by mainstream economists trough their scientific method. Not the other way around.

Other more traditional schools like Austrian and maybe the Chicago guys, use deductive learning to draw conclusions and do not use the scientific method.

"The Austrian praxeological method is based on the heavy use of logical deduction from what they perceive to be self-evident axioms; undeniable facts about human existence. The primary axiom from which Austrian economists deduce further certain conclusions is the action axiom which holds that humans take conscious action toward chosen goals. The axiom actually affirms many other axioms such as existence, identity, consciousness, and free-will. Austrian economists recognize this but focus on action and say that it is undeniable because in order to deny action, one would have to employ action in the act of denial." FROM WIKIPEDIA

i would argue that austrian economics is very inductive or at least based on inductive reasoning. i will yet again quote thomas aquinas who philosophy is a large part of the basis of austrian thinking. his five ways to prove the existence of good is very inductive.

http://www.mnstate.edu/gracyk/courses/web publishing/aquinasFiveWays_ArgumentAnalysis.htm

my opinion is that both are important (inductive and deductive) but neither should dominate they have strengths and weakness that compliment each other.

i think a lot of the problems with economics at the moment is greed and common sense (the lack of it). people will have to think out of the box.

 

[drsteph]

Quote from morganist:

i would argue that austrian economics is very inductive or at least based on inductive reasoning. i will yet again quote thomas aquinas who philosophy is a large part of the basis of austrian thinking. his five ways to prove the existence of good is very inductive.

http://www.mnstate.edu/gracyk/courses/web publishing/aquinasFiveWays_ArgumentAnalysis.htm

my opinion is that both are important (inductive and deductive) but neither should dominate they have strengths and weakness that compliment each other.

i think a lot of the problems with economics at the moment is greed and common sense (the lack of it). people will have to think out of the box.

I love St. Aquinas, one of my personal favorites (along with More, Plato, and Machiavelli). In the vernacular, he's 'da bomb.' I had not really considered austrian economics as an outgrowth of that. May have to go back and do a little more reading - its been a long time since college philosophy.

I also concur with your point that both methods of thinking are useful, but maintain my point that deductive logic is currently the primary method of inquiry.

The reason I bring up system trading is that those of us who do that have developed a system, then attempted to refine it. The amount of work necessary to refine the system to yield an additional 1% on average far exceeds the work to bring you to the first rough profitable 'solve'. Then squeezing out the next 0.1% becomes a tremendous slog, and thereafter you can refine until you are blue in the face but without much meaning. And, of course, by this point when you actually implement the system, it is excessively curve-fit and then doesn't work anyway!

On the other hand, for those who have been around a while, trading systems used to be primarily trend-following about 20 years ago when your good old moving average would do you just fine. Then, in a move of inductive logic, someone came up with the idea of doing statistical arbitrage and the market shifted. The subsequent refinement of the technique is deductive logic. I point out the amusing irony that the development of a deductive system was probably an inductive logical choice.

Induction = great breakthrough or big fail.
Deducton = refinement of an existing process.

 

[morganist]

Quote from drsteph:

I love St. Aquinas, one of my personal favorites (along with More, Plato, and Machiavelli). In the vernacular, he's 'da bomb.' I had not really considered austrian economics as an outgrowth of that. May have to go back and do a little more reading - its been a long time since college philosophy.

I also concur with your point that both methods of thinking are useful, but maintain my point that deductive logic is currently the primary method of inquiry.

The reason I bring up system trading is that those of us who do that have developed a system, then attempted to refine it. The amount of work necessary to refine the system to yield an additional 1% on average far exceeds the work to bring you to the first rough profitable 'solve'. Then squeezing out the next 0.1% becomes a tremendous slog, and thereafter you can refine until you are blue in the face but without much meaning. And, of course, by this point when you actually implement the system, it is excessively curve-fit and then doesn't work anyway!

On the other hand, for those who have been around a while, trading systems used to be primarily trend-following about 20 years ago when your good old moving average would do you just fine. Then, in a move of inductive logic, someone came up with the idea of doing statistical arbitrage and the market shifted. The subsequent refinement of the technique is deductive logic. I point out the amusing irony that the development of a deductive system was probably an inductive logical choice.

Induction = great breakthrough or big fail.
Deducton = refinement of an existing process.

i think it is important to distinguish between stock market analysis and economics. for me the stock market is of lesser importance than the questions raised in relation to the distribution of goods, which is the main point of economics. however i do understand it is part of that. my point being there are bigger problems that need to be addressed such as the moral problems in society. if people cared about other people it wouldn't matter what methods of economic control were used people would not go without.

this is more a inductive method of reasoning to distinguish why people behave the way they do and what can be done to resolve it.

 

[drsteph]

Quote from morganist:

i think it is important to distinguish between stock market analysis and economics. for me the stock market is of lesser importance than the questions raised in relation to the distribution of goods, which is the main point of economics. however i do understand it is part of that. my point being there are bigger problems that need to be addressed such as the moral problems in society. if people cared about other people it wouldn't matter what methods of economic control were used people would not go without.

this is more a inductive method of reasoning to distinguish why people behave the way they do and what can be done to resolve it.

No question that economics is a larger set of topography than the markets. However, being that my personal net worth is somewhere south of nine figures USD (the point at which you're really set in my book), I am not able to become a man of letters at this time and ponder the imponderables. I will, regretfully, focus on the applied sciences with the hopes that I can again return to the life of the mind I enjoyed in Uni.

 

[libertad]

The real issues regarding either method of reasoning will be that the data sets are never complete....from which reasoning depends....

There is always something else....that was not accounted for....

Thus the ills of economics....and reasoning in general....

Thus the prerequisite....

According to this described data set...and the method of review.....the conclusions are thus....

Not....this is the answer/solution/conclusion....

The point being that the data sets must be reviewed prior to one's own conclusions....

.......................................................................

As an aside....Bernanke had/has an incomplete data set....as has Summers....Geithner....Obama....etc....
Ie....Why was Volcker correct to raise rates previously ?

The current govt. case is explicitly clear....

The trend of A>B is because of a few predominant Xi's which are in the category of economic efficiencies of A vs B....etc....

The current govt. has totally ignored or does not take into serious consideration these dominant Xi's....

The state of the current journalistic/political descriptions is like listening to "children at play"...."utterly nonsensical"....

Solutions for the current ills can be written on the back of an envelope....but the politcos would rather just "do whatever it is that they do"....It seems as if just any road will do fine....leading to just anywhere....

ie....70-40-14 leaves 26 vs provisioning > 70....Politicos policies forcing 26 while announcing to the public that 70 is being approached....is what one would call "utter nonsense"....which will also force further monetary dilution....and even further ills....

 

[libertad]

Correction....

ie....70-30-14 leaves 26 vs provisioning > 70....Politicos policies forcing 26 while announcing to the public that 70 is being approached....is what one would call "utter nonsense"....which will also force further monetary dilution....and even further ills....

.................................................................................

This is called politico "hollywood" economics....

 

[Jachyra]

The classic example from philosophy 101 classes (at least during my college years) was something along the lines of: Two men sit in a room observing 2 alarm clocks. One alarm clock is set to go off at 7:59 and the other alarm clock is set to go off at 8:00. Once both alarm clocks have rang, the deductive observer might eventually deduce that the second alarm clock went off because it was set to go off 1 minute later than the first alarm clock, while the inductive observer might eventually induce that the first alarm clock was speaking to the 2nd alarm clock, and the 2nd alarm clock was simply being polite and talking back.

Now if you think about how some people (especially new traders) approach certain aspects of trading (i.e. the role and significance of studies and indicators as it relates to trading), you can see how easy it is to fall into the inductive trap -- did the market go up because the fast moving average crossed above the slow moving average (like CNBC's Dennis Kneale seems to believe and suggest)... or did the fast moving average cross above the slow moving average BECAUSE the market went up?

In my opinion, inductive reasoning tends to be more intuitive in our human nature... so we tend to want to react inductively... and deductive reasoning is learned through education... so education can offset our human tendencies to want to draw inductive conclusions.