Richard Thaler
Economist; director, Center for Decision Research, Booth School of Business, University of Chicago; coauthor (with Cass Sunstein), Nudge: Improving Decisions About Health, Wealth, and Happiness
I recently posted a question on Edge asking people to name their favorite example of a wrong scientific belief. One of my prized answers came from Clay Shirky. Here is an excerpt:
The existence of ether, the medium through which light (was thought to) travel. It was believed to be true by analogy—waves propagate through water, and sound waves propagate through air, so light must propagate through X, and the name of this particular X was ether.
It’s also my favorite because it illustrates how hard it is to accumulate evidence for deciding something doesn’t exist. Ether was both required by nineteenth-century theories and undetectable by nineteenth-century apparatus, so it accumulated a raft of negative characteristics: it was odorless, colorless, inert, and so on.
Several other entries (such as the “force of gravity”) shared the primary function of ether: They were convenient fictions able to “explain” some otherwise ornery facts. Consider this quote from Max Pettenkofer, the German chemist and physician, disputing the role of bacteria as a cause of cholera: “Germs are of no account in cholera! The important thing is the disposition of the individual.”
So in answer to the current Edge Question, I am proposing that we now change the usage of the word “Aether,” using the old spelling, since there is no need for a term that refers to something that does not exist. Instead, I suggest we use that term to describe the role of any free parameter used in a similar way: that is, “Aether is the thing that makes my theory work.” Replace the word “disposition” with “Aether” in Pettenkofer’s sentence to see how it works.
Often, Aetherists (theorists who rely on an Aether variable) think their use of the Aether concept renders their theory untestable. This belief is often justified during their lifetimes, but then along come clever empiricists, such as A. A. Michelson and Edward Morley, and last year’s tautology becomes this year’s example of a wrong theory.
Aether variables are extremely common in my own field of economics. Utility is the thing you must be maximizing in order to render your choice rational.
Both risk and risk aversion are concepts that were once well defined but are now in danger of becoming Aetherized. Stocks that earn surprisingly high returns are labeled as risky, because, in the theory, excess returns must be accompanied by higher risk. If, inconveniently, the traditional measures of risk, such as variance or covariance with the market, are not high, then the Aetherists tell us there must be some other risk; we just don’t know what it is.
Similarly, traditionally the concept of risk aversion was taken to be a primitive; each person had a parameter, gamma, that measured her degree of risk aversion. Now risk aversion is allowed to be time varying, and Aetherists can say with straight faces that the market crashes of 2001 and 2008 were caused by sudden increases in risk aversion. (Note the direction of the causation. Stocks fell because risk aversion spiked, not vice versa.)
So the next time you are confronted with such a theory, I suggest substituting the word “Aether” for the offending concept. Personally, I am planning to refer to the time-varying variety of risk aversion as Aether aversion.