A Changing World and the Prediction of Econometric Models

Nipawin - October 21, 2000 - by: Mario deSantis

Nobel prize
in Economics

Few days ago I talked to my son James who is presently finishing up his MBA program
at the University of North Dakota. I like to keep in touch with him not only for the purpose
to know that he is healthy and doing well in school, but also as an opportunity to exchange
ideas and stimulate our thinking. So this time I asked him if he knew the people who won
the Nobel prize in Economics and I was surprised to know that he knew already about it.



raise living standards

This year's Nobel prize in Economics were awarded to two US professors: James Heckman(1)
of the University of Chicago and Daniel McFadden(2) of the University of California.
These two professors have developed theories which could help raise living standards
through better predictions of human behavior based on statistical data. Excerpts of the
citation provided by the Royal Swedish Academy of Sciences included the following:

statistical methods and empirical applications

"The micro-econometric methods developed by Heckman and McFadden are now part of the standard tool kit not only of economists but also of other social scientists... A recurring theme in McFadden's research is his ability to combine economic theory, statistical methods and empirical applications where his ultimate goal has often been a desire to resolve social problems(3). "



baffled with uncertainties

I mentioned to James that econometrics is in essence the study of economic models
through a system of linear equations and that this method of linear thinking(4) in
predicting economic events is not compatible with the present fast pace of social changes
emphasizing knowledge and sharing of information. Under the current trend of social
changes we are continuously baffled with uncertainties and rather than predicting the
future our emphasis will be in creating it.



flexible and dynamic social and economic models

Therefore, I said to James that the traditional discipline of econometrics has to give away
to more flexible and dynamic social and economic models where simulation(5) and
system dynamic(6) techniques are being used to create imaginative microworlds(7), and
where such microworlds are continuously shared, validated and updated by interested
researchers. But I also reminded James that we must never forget where we are at, and that
therefore any change has a contextual component, that is we must never negate the present
world and that every change, even if unpredictable, must start somewhere, where we are at.


Jim Heckman is the Henry Schultz Distinguished Service Professor of Economics at TheUniversity of Chicago


Daniel L. McFadden, E. Morris Cox Professor of Economics and 2000 Nobel Laureate Director, Econometrics


US theorists take Nobel for numbers with a human face, Yahoo! Asia - News, October 11 7:50 PM SGT,STOCKHOLM, Oct 11 (AFP)


The paradox of Linear Thinking has been described by the saying that "nine women can't make a baby in one month"


Simulation is a powerful tool for checking your understanding of the world around you (microworlds). It is an efficient communication tool, showing how a process works while stimulating creative thinking about how it can be improved.


System Dynamics in Education: Commonality of Structure and Behaviour, by Mario deSantis, March 28, 1999


A Microworld is a learning environment where people move beyond their defenses and design mini-experiments. The Fifth Discipline, by Peter Senge, first paper back edition, 1994, page 403