What role for economics in predictive analytics?

In the age of big data, Robert Lucas's (Nobel Laureate 1995) critique is again relevant. When we change the incentives of firms and consumers, they will change their behavior. Our insights from old data, even when N=all, no longer apply.

Transcript

1. What role for economics in predictive analytics?
   Mikl´
   os Koren
   CEU MicroData
   miklos.koren.hu
   @korenmiklos
   Budapest BI Forum 2014
   

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2. What role for economics in predictive analytics?
   

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3. How would Amazon decide on a radical innovation?
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4. Outline
   1. How models help
   2. Insights from economics
   3. Lessons for implementation
   

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5. 1. Models
   

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6. 1. Models
   Models help think about changes that have never happened before.
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7. More car owners switch insurers during the November
   campaign (Kiss, 2014)
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8. Is it cheaper for them, or are they more attentive?
   Structural e↵ects on switching costs vs inattention
   Andr´
   as Kiss (CEU) Salience and switching Nov 7, 2014 44 / 56
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9. 2. Economics
   

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10. 2. Economics
    Economics helps business, economic and social decisions with two
    key ideas.
    

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11. 2. Economics
    Economics helps business, economic and social decisions with two
    key ideas.
    2a. People respond to incentives
    If you succeed in changing people’s behavior, insights from old
    data no longer apply.
    

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12. 2. Economics
    Economics helps business, economic and social decisions with two
    key ideas.
    2a. People respond to incentives
    If you succeed in changing people’s behavior, insights from old
    data no longer apply. Robert Lucas (Nobel Laureate 1995)
    

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13. 2. Economics
    Economics helps business, economic and social decisions with two
    key ideas.
    2a. People respond to incentives
    If you succeed in changing people’s behavior, insights from old
    data no longer apply. Robert Lucas (Nobel Laureate 1995)
    2b. Systems adapt
    Not all great ideas scale.
    

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14. 2. Economics
    Economics helps business, economic and social decisions with two
    key ideas.
    2a. People respond to incentives
    If you succeed in changing people’s behavior, insights from old
    data no longer apply. Robert Lucas (Nobel Laureate 1995)
    2b. Systems adapt
    Not all great ideas scale. (equilibrium feedback effects)
    

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15. Side effects of PROGRESA: non eligibles also gain (Angelucci
    and de Giorgi, 2009)
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16. Predictive tools change our behavior
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17. 3. Implementation
    

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18. 3. Implementation
    Keep it simple. (Atul Gawande: Checklist Manifesto)
    Look out for the incentives of people making the change.
    

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19. Why don’t Pakistani football makers adopt a simple
    innovation? (Atkin et al. 2014)
    Figure 1: “Buckyball” Design
    Figure shows the standard “buckyball” design. It combines 20 hexagons and 12 pentagons
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20. Better arrangement of pentagons would reduce waste by a
    third
    Figure 11: Cutting Pattern for “O↵set” Four-Pentagon Die
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     39.5 
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    Figure displays the cutting pattern for the four-panel o↵set die.
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21. Conclusions
    

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22. Conclusions
    1. Models help evaluate counterfactual decisions.
    2. Economics (incentives work, systems view) improves business
    and social decisions.
    3. Social sciences (economics, sociology, psychlogy) help
    implementation.
    

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23. Conclusions
    1. Models help evaluate counterfactual decisions.
    2. Economics (incentives work, systems view) improves business
    and social decisions.
    3. Social sciences (economics, sociology, psychlogy) help
    implementation.
    Even Amazon needs economists!
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