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Bubbles and gullibility

18 June 2011 Leave a comment

Odlyzko [1] proposed a measure of gullibility, called the gullibility index, as a quantitative tool for developing realistic economic models. He argued that gullibility and innumeracy are strongly correlated, where innumeracy is understood to mean “the inability to reason with numbers and other mathematical concepts”. For example, answer the following question. What weighs more: a tonne of bricks or a tonne of feathers? Answer: both are of the same weight since each is a tonne. That we are comparing bricks with feathers is irrelevant. Innumeracy is almost universal in the sense that even people with higher degrees such as PhDs and MBAs do show signs of innumeracy. Furthermore, people who exhibit high degrees of numeracy could also fall prey to suspiciously false quantitative stories. A case in point is John Allen Paulos who related in [2] his falling victim to the Internet bubble of the early 2000s.

References

[1] A. Odlyzko. Bubbles, gullibility, and other challenges for economics, psychology, sociology, and information sciences. First Monday, 15(9), 2010.

[2] J. A. Paulos. A Mathematician Plays the Stock Market. Basic Books, 2003.

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