When I was a young assistant professor at Yale, one of my senior colleagues, Nobel Laureate James Tobin, wryly observed that the bad old days when researchers had to do calculations by hand were actually a blessing. The effort was so great that people thought hard before calculating. They put theory before data. Today, with terabytes of data and lightning-fast computers, it is too easy to calculate first, think later.
Ironically, a Yale professor named Aleh Tsyvinski recently went on a massive data mining expedition with Yukun Liu (then a graduate student, now a professor himself at the University of Rochester). Even more ironically, Tsyvinski is the Arthur M. Okun Professor of Economics at Yale, an endowed chair named after Tobin’s close friend Arthur Okun. Okun was a consummate believer in economic analysis that makes sense and is useful.
Tsyvinski and Liu set out to find statistical correlations between bitcoin returns and other variables. There is no logical reason for bitcoin returns to be affected by anything other than guesses about future bitcoin returns. Unlike bonds that yield interest, stocks that yield dividends, apartments that yield rent, businesses that yield profits, and other real investments, bitcoin doesn’t yield anything at all, so there is no compelling way to value bitcoin the way investors can value bonds, stocks, apartments, businesses, and other real investments.
Attempts to correlate bitcoin returns with real economic variables are destined to disappoint. Yet Liu and Tsyvinski did exactly that and their disappointments are instructive.Gary Smith, “Computers excel at finding temporary patterns” at Mind Matters News
Substitute “pterosaur” for “bitcoin” and you likely get the same problem in biology.
See also: Why it’s so hard to reform peer review. Reformers are battling numerical laws that govern how incentives work. Know your enemy! (Robert J. Marks)