A Priori versus Empirical Reasoning and Practical Decision-Making
Courtesy of Jesse’s Café Américain
A Priori:
from Latin, literally "from the former." Reasoning that starts from accepted first principles or facts requiring no proof or foundation, being self-evident to the believer
Empirical:
a. Relying on or derived from observation or experiment: empirical results that supported the hypothesis. b. Verifiable or provable by means of observation or experiment: empirical laws. 2. Guided by practical experience and not theory,
A Priori reasoning is often associated with religion and other belief systems, because it is ‘top down’ reasoning from a given, accepted fact that is judged to be self-evident and sufficient in itself. So for example, if one believes in an all-powerful and loving God, one can start making logical deductions from that first principle.
Empirical reasoning is often associated with the ‘scientific method.’ This is reasoning based from the "bottom up" based on data, evidence and replicable experimentation and demonstrable relationships. Empirical reasoning can only take one so far, and generally follows the pattern of hypothesis – proof – re-examination – new hypothesis based on new data or insights.
In Economics, it never ceases to amaze how quickly people gravitate towards a priori reasoning once they have become wedded to a belief in an idea, a trading system, or a person.
If I believe, for example, that deflation is inevitable, then I will selectively choose data to support this view, and evaluate all information in the light of deflation as a given outcome, rejecting or diminishing all other contrary data.
One can make the same case, for example, for those that believe that hyperinflation is an inevitable outcome. Or in the infalliblity of a particular trading system like Elliot Waves.
In less lofty terms, it is like what we call a prejudice, although that term has become too specifically associated with racism in the modern world. It is literally a prejudging.
Sometimes the lengths to which true believers will go to hold their opinion becomes almost funny, if it is not so often accompanied by ad hominem attacks and rather nasty, immature behaviour when the true believer becomes cornered by reality.
How funny is it, for example, to see a noted pundit keep drawing lines in the sand for the maximum price appreciation of a commodity like gold, and having to change them every year, ignoring past failures and pretending as though they have not been wrong, not daring to highlight their failure and attempt to explain it.
There is always an alternate count, always the oddly possible but highly improbable excuse or rationale for their own mistaken belief.
One can believe in something that might eventually become true. The ‘belief’ part is accepting the truth before any rational evidence would lead one to accept it. It really depends on the odds, and whether they get ‘lucky.’
This by the way is the problem I had with some of the adherents to the Austrian school of economics and the monetarists as well. They believe something, and prefer to twist the data to support predispositions and claims that are not correct on close examination by the unbiased mind.
A scientific approach is to assess what is, rather than what we would like things to be, and to draw conclusions carefully from it, calculating probabilities when the evidence does not support a single outcome, and a willingness to accept new data and act on it when it appears, even if it appears contrary to a current working hypothesis.
This does not mean it is wrong to carefully examine evidence that seems to be ‘on the tails’ of our existing body of knowledge, to see if an adaptation of the hypothesis is all that is required.
Wny is this important to us here in this forum?
Because belief is in the realm of the spiritual and the philosophical. Even a statement like "it is self-evident that all men are created equal" is clearly an appeal to a philosophical stance.
Finance, business, trading are not worthy of belief excepting for the ethical implications of behaviour that is contingent on all realms of human endeavor, depending on what one believes.
So, in trading, try to avoid becoming a ‘true believer’ in one idea or one person. They are likely to be flawed, and will very often blind the believer to the reality of the situation, so that they can lose impressive amounts of money fruitlessly following a ‘belief’ that has no validity in this particular case.
In other words, no one knows the future for certain. There are always probabilities involved in every situation, every outcome. Some are more easily discerned than others, but they tend to be in the long and short term trends.
By the way, people naturally tend to carve the ‘hits’ or successful wagers based on their system or belief in marble, and write the ‘misses’ in sand. They tend to fool themselves as a portion of the belief in what they think must be true. It is a natural, but potentially deadly, behaviour.
In religion, faith alone can lead one to do outlandish things as in the south seas cargo cults, and so there is the thought that one relies on faith and reason together. But of course reason can only take one so far, and then one is faced with what Kirkegaard called ‘the leap of faith.’
One might be willing to ‘lose money’ for the sake of righteousness by refusing to engage in unethical behaviour. But foolish is the person who loses money because they have put their belief in human error, in party politics, in groupthink, and prejudice. On an almost daily basis I see otherwise intelligent people making this mistake, and Wall Street takes advantage of it. When the leap of faith is applied to the deployment of a trading account it is too off a leap off a cliff.
