Distrust: Big Data, Data-Torturing, and the Assault on Science
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GarySmithhasdoneitagain. Distrust isawildridethatderailstheBigData hypetrainwithforce,style,andaboveallsardonichumour.Smithisamasterof illustratingbyexample—examplesthatarefresh,unexpected,attimesshocking,andattimeshilarious.ComealongonSmith’stourofstatisticalsnake-oil andyou’llneverlookatAIordatasciencethesamewayagain.
—CarlT.Bergstrom ProfessorofBiology,UniversityofWashington
Authorof CallingBullshit:TheArtofSkepticisminaDigitalWorld
AnyfanofCarlSagan’s TheDemonHauntedWorld willlovethisbook.Like Sagan,Smithdiscussesthechallengestohumanprogressthatresultfroma lackofcriticalthinkingskills,andhedoessowithaSagan-esquekeeneye andeloquentvoice.Smithalsomakesclearhowthethreatstosoundjudgment andeffectivedecisionsaremoreformidablethanthoseofSagan’sday,asfaulty thinkingisnowaidedandabettedbyanInternet-fuelleddistrustofscience, viralmisinformation,andvenomousconspiracytheories.Thewisdominthis bookisdesperatelyneeded.
—TomGilovich IreneBleckerRosenfeldProfessorofPsychology CornellUniversity Authorof TheWisestOneintheRoom
Itturnsoutthat,unlikethemythicalhero,AIhastwoAchilles’heels.Notonly arethetechnologiesnotintelligent,moreperniciously,neitheraretoomuchof thestatisticsanddatauseonwhichAIandbigdatarely.GarySmithprovides abrilliantlyexecutedcounteragainstpseudo-scienceandtheaccumulating garbagewemisleadinglycallinformation,includingtimelyandimportant warningsandwaysforwardforpolicy-makers,practitioners,academics,and citizensalike.
—LeslieWillcocks ProfessorEmeritus,LondonSchoolofEconomicsandPoliticalScience
Animmenselyreadablelookatwhyweneedsciencemorethanever,butalso whyandhowscienceneedstocleanupitsact.Recommendedforanyonewho occasionallywonderswhetherthat“outspoken”familymemberonFacebook mightjusthaveapoint.
—NickBrown,PhD,scientificintegrityresearcher
Smithmarvellouslyillustratestheevolutionofdisinformation.Herichly demonstrateshowblindfaithintechnologyenablesmoremisrepresentationsof thetruth.Distrust articulatesahumblingviewofhowweshouldthinkcritically aboutnewfindingsfromhypedtechnologytrends.
—KarlMeyer,ManagingDirector,DigitalAlphaAdvisorsLLC FormerPartneratKleinerPerkins
Distrust GARYSMITH GreatClarendonStreet,Oxford,OX26DP, UnitedKingdom
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INTRODUCTION Disinformation,DataTorturing,andDataMining
Whatwerethegreatestinventionsofalltime—notcountingfire,the wheel,andslicedbread?Theprintingpresshastobenearthetop ofanyone’slistbecauseitallowedideasandinventionstobespread widely,debated,andimproved.Electricity,internalcombustionengines,telephones,vaccinations,andanesthesiasarealsoworthycandidates.Thesearejust thevery,verytopofavery,verylonglist.Lookaroundyou,atyourcomputer, eyeglasses,refrigerator,plumbing,andalloftheothereverydaythingswetake forgranted.
Wherewouldwebewithoutscience—livingshortbrutishlivesincaves?Iexaggerate,butnotmuch,andonlytomakethepointthatscienceandscientists haveenrichedourlivesbeyondmeasure.Iincludeeconomists,psychologists, andother“softer”scientistsinthisgroup.DuringtheGreatDepressioninthe 1930s,governmentseverywherehadsolittleunderstandingoftheeconomy thattheirpolicieswereutterlycounterproductive.WhenFranklinRoosevelt campaignedforU.S.Presidentin1932,hepromisedtoreducegovernment spendingby25percent.Oneofthemostrespectedfinancialleaders,Bernard Baruch,advisedRooseveltto“Cutgovernmentspending—cutitasrationsare cutinasiege.Tax—taxeverybodyforeverything.”TheFederalReserveletthe moneysupplyfallbyathirdandCongressstartedatradewarthatcaused exportsandimportstofallbymorethan50percent.
Today,thankstotheoreticalandempiricaleconomicmodels,we(well,most ofus)knowthatspendingcuts,taxhikes,monetarycontractions,andtrade warsareexactlythewrongpoliciesforfightingeconomicrecessions.Thisis why,duringtheglobaleconomiccrisisthatbeganintheUnitedStatesin2007,
governmentsdidnotrepeattheerrorsofthe1930s.Withtheworldeconomy onthebrinkofasecondGreatDepression,governmentsdidtherightthing bypumpingtrillionsofdollarsintotheirdeflatingeconomies.Dittowiththe COVID-19economiccollapsein2020.Plus,scientistsdevelopedthevaccines thattamedtheCOVIDpandemic.
Unfortunately,scienceiscurrentlyunderattackandscientistsarelosing credibility.Therearethreeprongstothisassaultonscience:
Disinformation
Datatorturing
Datamining
Ironically,science’shard-wonreputationisbeingunderminedbytoolsinvented byscientists.DisinformationisspreadbytheInternetthatscientistscreated. Datatorturingisdrivenbyscientists’insistenceonempiricalevidence.Data miningisfueledbythebigdataandpowerfulcomputersthatscientistscreated.
InthisIntroduction,Iwilluseexamplesrelatedtobitcointoillustratethis tragedy.
Money Moneyisasecretsauceforeconomicprogressbecauseitallowspeopletospecializeinjobstheyaregoodatandusethemoneytheyarepaidtobuythings frompeoplewhoaregoodatotherjobs.Prettymuchanythingcanserveas moneyaslongaspeoplebelievethatitcanbeusedtobuythings.Ifthatsounds circular,itis.
Inpractice,overthepast4000years,thepredominantmoneyshavebeen preciousmetals—mostlysilver,toalesserextentgold,andevenlessfrequently copper.However,anenormousvarietyofothermoneyshavealsobeenused. Wampum(beadsmadefromshells)waslegaltenderinseveralAmerican colonies.TobaccowasusedasmoneyinVirginiafornearly200years,inMarylandfor150years,andinneighboringstatesforshorterperiods.Infact,a1641 lawmadetobaccolegaltenderinVirginiaandprohibitedcontractspayablein goldorsilver.Rice,cattle,andwhiskeyhavebeenlegaltenderand,although
theylackedlegalsanction,musketballs,hemp,furs,andwoodpeckerscalps havealsobeenusedasmoney.
TheislandofYapinMicronesiaisrenownedforusingstonemoneyformore than2000years.AsshowninFigure I.1,these raistones areroundlikeawheel withaholeinthecenterandoftentallerthanaperson.Thestoneswereobtained bycanoeexpeditionstoPalauor,forfinerandrarerstones,toGuamsome 400milesaway.Theseaswereoftenstormyandthedestinationshostile.Many canoesneverreturned.
Inthe1870s,DavidDeanO’Keefe,anAmericanwithasturdyboat,brought enormousstonesintoYapinexchangeforcoconuts,fish,andwhateverelsehe wanted.Thelargeststone,saidtobe20feettall,isatthebottomoftheYap harbor,whereitfellwhilebeingunloadedfromhisschoonerontoaraft.Even thoughthestonedisappearedfromview,itisstillconsideredtobemoneyby generationaftergenerationofowners.
Today,theislandersusestonebeads,seashells,beer,andU.S.dollarsfor smalltransactions.Thelargestonesareusedtopayforland,permissionto
FigureI.1 Araistone.
marry,politicaldeals,andsubstantialdebts.Whenalargestonechangesownership,atreecanbeputthroughitsholesothatitcanberolledfromitsold ownertoitsnewone.Becauseabrokenstoneisworthless,stonesareoftenleft inonespot,withtheownershipcommonknowledge.Thelargeststonesareso wellknownthattheyhavenames.Thepeoplepasson,butthestonesremain.
ThestonesacquiredbeforethearrivalofO’Keefearethemostvaluable;those broughtinbyO’Keefeareworthhalfasmuch;andmorerecentstonesareessentiallyworthless.In1984 TheWallStreetJournal reportedthatanislander boughtabuildinglotwitha30-inchstone,explainingthat“Wedon’tknowthe valueoftheU.S.dollar.”
Usingstonesforcurrencyseemsodd,butisitanyodderthanusingpaper money?TheYapislandersacceptraistonesaspaymentbecausetheyareconfidentthattheycanusethestonestobuythingstheywant.Theiracceptanceas moneyrestsonthisconfidence,nothingmore.Thesameistrueofourmoney. Itisworthlessexceptforthefactthatitcanbeusedtobuythings.
Moneydoesn’tneedtobesomethingwecanholdinourhands,andmost ofuschoosetoliveinanessentiallycashlesssocietyusingelectronicrecords oftransactions.Ourincomecangodirectlyintoourbankaccountsandour billscanbepaidwithacheck,debitcard,creditcard,ordirectlyfromourbank accounts.Cashisonlyneededforpayingpeoplewhowon’ttakechecksorcredit cards—perhapsforbuyingfoodatalocalfarmer’smarket,payingourchildren tomowthelawn,ormakingpurchaseswedon’twantthegovernmenttoknow about.
Evenso,theamountofcashincirculationcontinuestogrow.Thereisnow morethan$2trillioninU.S.currencyincirculation,including18billion$100 bills—anaverageof54BenjaminsforeveryAmericanman,woman,andchild. Therearemore$100billsthan$1bills.
Wherearethese18billionBenjamins?Ithasbeenestimatedthatmorethan halfofallU.S.cashisheldoutsidetheUnitedStates.Someisheldasreserves bycentralbanks;someisusedbycitizensandbusinessesasasecondcurrencyorasahedgeagainsteconomicinstability.Muchofthecash,domestically andabroad,isusedforillegaloruntaxedactivitiesthatleavenoelectronic record.
Whichbringsustobitcoin,theoriginalandmostwell-knowncryptocurrency.Thebitcoinconceptwasunveiledina2008paperwrittenbysomeone usingthepseudonymSatoshiNakamotoandwasimplementedthefollowing year.
Whennewsstoriesarewrittenaboutbitcoin,thereisoften,asinFigure I.2, anaccompanyingimageofagold(orsometimessilver)coinwithalargeBand verticalhashmarks,likeadollarsign.
Thereis,ofcourse,nobitcoincoin.Bitcoinsandothercryptocurrenciesare digitalrecords—likebankaccountsandcreditcards.Thedifferenceisthatbank accountandcreditcardrecordsaremaintainedbyfinancialinstitutionsandtied tosocialsecuritynumbers,whilecryptocurrencytransactionsarerecordedin adecentralizedblockchainthat,intheory,preservestheanonymityofusers.
Nobodywithacreditcardoracheckingaccountneedstouse$100billsor bitcoins,butpeoplewhowanttobuyorsellthingsinsecretlikethem.Itshould notbesurprisingthatgovernmentshavebeenabletoforcebitcoindealersto turnoverfinancialrecords,leadingtoarrestsandbitcoinconfiscations.Unlike bagsof$100bills,blockchaintechnologycanactuallycreateanelectronictrail thathelpslawenforcementofficialsfollowthemoneyanddocumentcriminal transactions.
Blockchaintransactionsaresoslowthatthevalueofabitcoincanchange substantiallybetweenthebeginningandendofatransaction.Transactionsare alsoexpensive,andenvironmentallyunfriendly.In2021,CambridgeUniversity researchersestimatedthatbitcoinblockchainsconsumeasmuchelectricityas theentirecountryofArgentina,withonly29countriesusingmoreelectricity thanbitcoin.Bitcoinisessentiallystrip-miningtheclimate.
InJune2022,agroupof1500prominentcomputerscientistssignedalettertoU.S.Congressionalleadersstatingthatblockchaintechnologyis“poorly suitedforjustabouteverypurposecurrentlytoutedasapresentorpotential sourceofpublicbenefit.”
FigureI.2 Amythicalbitcoin.
Thefactthatbitcoinhasnoinherentvaluemakesitagreatexampleofthe threethemesrunningthoughthisbook:disinformation,datatorturing,and datamining.
Disinformation Alargepartoftheinitialallureofbitcoinwasthattheunderlyingblockchain technologywasnotcreatedbytheeconomicandfinancialelitebutbyamysteriousoutsiderwhoseidentityisstillunknown.ADavidsteppeduptobattle Goliath.Bitcoinisnotcontrolled,regulated,ormonitoredbygovernmentsor thebankingsystem. TheDeclarationofBitcoin’sIndependence,endorsedby numerouscelebrities,statesthat
Weholdthesetruthstobeself-evident.Wehavebeencyclicallybetrayed,liedto,stolen from,extortedfrom,taxed,monopolized,spiedon,inspected,assessed,authorized, registered,deceived,andreformed.Wehavebeeneconomicallydisarmed,disabled,held hostage,impoverished,enervated,exhausted,andenslaved.Andthentherewasbitcoin.
PaulKrugman,aneconomicsNobelLaureateand NewYorkTimes columnist, haswrittenthatbitcoinis
somethingofacult,whoseinitiatesaregiventoparanoidfantasiesaboutevilgovernmentsstealingalltheirmoney ... JournalistswhowriteskepticallyaboutBitcointellme thatnoothersubjectgeneratesasmuchhatemail.
Ilearnedfirsthandaboutthecult’sparanoiawhenIwrotesome MarketWatch columnsaboutbitcoin.Hereareafewresponses(withspellingmistakes corrected)frominfuriatedreaders:
RichpeoplefearBitcoinasitmeanstheirwealthcouldbeshiftedoverto“peasants” andarescaredofbecomingirrelevant.
Bitcoinmakescrossborderpaymentspossibleandprovidesaneasywayforpeople toescapefailedgovernmentmonetarypolicy.
NobodybelievethisorchestratedFUDwhichisallpaidforbyAmericanExpressand otherbankinginstitutions.
FUDisapopularacronymfor“fear,uncertainty,anddoubt.”AnotherisHODL. AnenthusiastoncemisspelledHOLDasHODL(therearelotsofmisspellingon bitcoinforums)anditwasmisinterpretedasanacronymfor“holdonfordear life.”BitcoinfanaticsignoretheFUDandjustHODL.
Theironyhereisthatscientistscreatedourhighlyefficientfinancialsystem. TheyalsocreatedtheInternetthatbroadcaststhebitcoingospelthatdenounces ourfinancialsystem.Conspiracytheoriesandparanoiaareasoldasthehuman race,buttheInternethasmadetheircirculationfastandfrenzied.
TorturedData Cryptocurrenciesarealousywaytobuyandsellthings.Ontheotherhand, manygulliblespeculatorsthinkthatwildlyfluctuatingbitcoinpriceswillmake themrich.Startingfromapriceof$0.0008in2009,bitcoin’spricetopped $67,000inNovember2021.Figure I.3 showsthewildupsanddownsinprices since2014.
2014201520162017201820192020202120222023 Price, dollars
FigureI.3 Herewegoagainandagain.
Itisnosurpriseandthatprofessionalsandamateurshavesearchedforways topredictwhichdirectionbitcoinpriceswillgonext.Theunsolvableproblem isthatthereisnorationalexplanationformovementsinbitcoinprices.How cananyonepredicttheirrational?
The intrinsicvalue ofaninvestmentishowmuchyouwouldbewillingto paytoholditforever.Theintrinsicvalueofastockisthepriceyouwouldpay togetthedividends.Theintrinsicvalueofabondisthepriceyouwouldpay togettheinterest.Theintrinsicvalueofanapartmentbuildingisthepriceyou wouldpaytogettherents.Theintrinsicvalueofbitcoiniszerobecauseyouget nocashfromholdingit.
Investorswouldbuystocks,bonds,andapartmentbuildingsevenifthere werealawthatprohibitedthemfromeverselling.Theywouldnotbuybitcoins underthatconditionbecausetheonlywaytomakeaprofitistosellthemto someoneelse.ThisiscalledtheGreaterFoolTheory—buyatafoolishprice, hopingtoselltoanevenbiggerfool.
DuringtheDutchtulipbulbbubble,bulbsthatmighthavefetched$20(in today’sdollars)inthesummerof1636wereboughtbyfoolsinJanuaryfor$160 andboughtbybiggerfoolsafewweekslaterfor$2000.Thepricesofexotic bulbstopped$75,000.DuringtheSouthSeaBubbleinthe1700s,foolsbought worthlessstockinhopesofsellingtobiggerfools.Onecompanywasformed “forcarryingonanundertakingofgreatadvantage,butnobodyistoknowwhat itis.”Theshamelesspromotersoldallthestockinlessthanfivehoursandleft England,nevertoreturn.Anotherstockofferwasforthe“nitvender”orselling ofnothing.Yet,nitwitsboughtnitvenders.
Bitcoinsareamodern-daynitvender.Now,asthen,pricesaredrivenby fear,greed,andotherhumanemotions—whatthegreatBritisheconomistJohn MaynardKeynescalled“animalspirits.”Peoplebuybitcoinbecausetheyhope thatbiggerfoolswillpayhigherprices.
In2017,asthebitcoinbubblepickedupspeed,thestockpriceofLong IslandIcedTeaCorp.increasedby500percentafteritchangeditsnameto LongBlockchainCorp.Atthepeakofthebitcoinbubble,acompanyintroducedacryptocurrencythatdidn’tevenpretendtobeaviablecurrency.Itwas truthfullymarketedasadigitaltokenthathad“nopurpose.”Yet,peoplespent hundredsofmillionsofdollarsbuyingthisnitvender.
TheWildWestofBanking,Again OnJuly13,2022,theCoinMarketCapwebsitereportedthepricesof9909 cryptocurrencieswithatotalmarketvalueof$900billion.Seeingthis,Iwas remindedoftheWildWestperiodofAmericanbanking.Intheearly1800s, therewerethousandsofbank-issuedcurrencies.Onehistorianwrotethat corporationsandtradesmenissued“currency.”Evenbarbersandbartenderscompeted withbanksinthisrespect ... nearlyeverycitizenregardeditashisconstitutionalright toissuemoney.
OnesuccessfulMidwesternbankerrecalledhisstartinthebusiness:
Well,Ididn’thavemuchtodoandsoIrentedanemptystoreandpainted“bank”on thewindow.Thefirstdayamancameinanddeposited$100,andacoupleofdayslater, anothermandepositedanother$250andsoalongaboutthefourthdayIgotconfidence enoughinthebanktoputin$1.00myself.
BythetimeoftheCivilWar,therewere7000differentbankcurrenciesin circulation,ofwhich5000werecounterfeit.Bankswerestate-regulatedandregulationsregardingprecious-metalreserveswerelax.AMassachusettsbankthat hadissued$500,000inbanknoteshad$86.48inreserves.InMichigan,acommoncollectionofreserves(includinghiddenlead,glass,andten-pennynails) passedfrombanktobank,aheadofthestateexaminers.Openingabankand issuingbanknotesseemedlikeaneasywaytoliterallymakemoney.Itwasan occupationthatattractedthemostreputableandpublic-spiritedpeopleandthe lowestandmostdown-and-outscoundrels.Manyhelpedthecountryprosper; otherssimplyredistributeditswealth.
Figure I.4 showsthelavishlyembellished$1billissuedbytheDetroitCity Bank,whichwassaidtobebackedby“PledgedProperty”of“RealEstate& PrivateHoldings.”Thebankopenedin1837andclosedin1839.
FigureI.4 A$1billissuedbytheDetroitCityBank. Credit:PaperMoneyGuarantee.
Therewasnoneedforthousandsofbankcurrenciesinthenineteenthcenturyandthereisnoneedforthousandsofcryptocurrenciestoday.Perhapsthe mostludicrous(itisadmittedlyatoughcall)isDogecoin,whichwascreated asajokebytwosoftwareengineers.Itadvertisesitselfasthe“funandfriendly internetcurrency”andusesthefaceofaShibaInudogfromthe“Doge”meme asitslogo(Figure I.5).Inthefirst30daysafteritsofficiallaunchonDecember6,2013,morethanamillionpeoplevisiteddogecoin.com.InJanuary2014, Dogecoin’stradingvolumewaslargerthanthatofallothercryptocurrencies
combined.Soon,everyDogecointweetfromElonMusksentshockwavesto Dogecoinprices.OnMay7,2021,Dodgecoin’stotalmarketvaluehit$82billion,makingitthethirdmostvaluablecryptocurrency(behindbitcoinand Ethereum).Twomonthslater,itsvaluehadplummeted90percentandMusk wassuedformarketmanipulation.
Somestruggledtomakesenseofthisnonsense.AneconomistattheUniversityofNewSouthWalesBusinessSchooldescribedDogecoinas“notso muchanalternativedeflationarynumismaticinstrumentasitisaninflationary leisuredexplorationofcommunity-buildingaroundacryptoasset.”Thatkind ofgobbledegookhardlyenhancesthereputationofscientists.
Meanwhile,thetwoDogecoinco-foundersbailed,evidentlyexasperated andembarrassedthattheirjokehadgottenoutofcontrol.Onewrotethat, “Cryptocurrencyisasolutioninsearchofaproblem ... .Ifanything,itexistsasaneducationaltool.It’sareminderthatwecan’ttakethisstuffseriously.” Theotherexplainedhisdeparture:“Iwaslike,‘Okay,thisisdumb.Idon’twant tobetheleaderofacult.’”
FigureI.5 Acutepuppycoin.
JustWhenYouThoughtitCouldn’tGet AnyCrazier Asifcryptocurrenciesweren’tsufficientlyfoolish,wenowhaveCryptoKittiesandothercrypto-collectibles.Bitcoinsare fungible inthatallbitcoinsare identicalandinterchangeable.Acrypto-collectible,incontrast,isaunique, non-fungibledigitaltoken(NFT)thatcannotbecopied,substituted,orsubdivided.
Almostallcrypto-collectiblesaretradedandvalidatedonEthereum’s blockchainnetwork.CryptoKittieswereunveiledin2017andpricessoared, withtheDragoncryptoKittysellingfor$172,000in2018.Cryptopunkswere unleashedin2017,andasofDecember9,2022,thecreatorsofcryptopunksreportedthattherehadbeen15,496salesforatotalof$2.47billion.InJune2021, theAlienCryptopunkwithaMaskshowninFigure I.6 soldfor$11.8million toShalomMeckenzie,thelargestshareholderofDraftKings,afantasysports bettingorganization.
Ifitseemsfittingthatafantasysportsmogulwouldbuyfantasyart,itiseven moreironicthatin2018,agroupclaimingtobeboredMITstudentscreated EtherTulips—NFTsthatlookliketulips.Thefounderswerebrutallyhonest:
[L]otsofpeoplehavebeencallingcryptothebiggestbubblesinceTulipmania.Well, we’reagroupofboredcollegestudentsanddecidedtopushthecrazetothenextlevel byputtingvirtualtulipsontheEthereumblockchain!
TheEthertulipswebsiteisequallycandid:
Tulipmaniawasabubbleinthe17thcenturyduringwhichpricesfortulipsroseto ridiculouslevels.Onebulbcostmorethanahouse!Thetulipmarketcrashedin1637, soyouwereborntoolatetoparticipate—butnoworries!We’rebringingtulipmaniato the21stcentury.
Iwasconvincedthatthesewereindeedboredcollegestudentswhenthey includedthepunchline:“Whatcouldgowrong?”
TheAlienCryptopunkwithamask. Credit:CourtesyofSotheby’sandLarvaLabs.
MarketManipulation Thereisanotherimportantfactordrivingcryptocurrencyprices.Inapumpand-dumpscheme,agroupofscammerscirculateuntruthfulrumorsaboutan investment,whiletradingitbackandforthamongthemselvesateverhigher prices,luringinthecredulous.Afterpriceshavebeenpumpedup,theconspiratorsdumptheirholdingsbysellingtothesuckers(aka“bagholders”).In 2019, TheNewYorkTimes reportedthatDonaldTrumphadbeeninvolvedina handfulofpump-and-dumpschemesinthelate1980s:
Aslossesfromhiscoreenterprisesmounted,Mr.Trumptookonanewpublicrole, tradingonhisbusiness-titanbrandtopresenthimselfasacorporateraider.Hewould acquiresharesinacompanywithborrowedmoney,suggestpubliclythathewascontemplatingbuyingenoughtobecomeamajorityowner,thenquietlysellontheresulting riseinthestockprice.
FigureI.6
The tacticworkedforabriefperiod—earningMr.Trumpmillionsofdollarsingains— untilinvestorsrealizedthathewouldnotfollowthrough.
Bitcoin’spricesurgesoftenseemlikepump-and-dumpscams.Krugmanhas writtenthat
Bitcoin’suntetherednaturealsomakesithighlysusceptibletomarketmanipulation.Back in2013fraudulentactivitiesbyasingletraderappeartohavecausedasevenfoldincrease inBitcoin’sprice.Who’sdrivingthepricenow?Nobodyknows.Someobserversthink NorthKoreamaybeinvolved.
In2019the WallStreetJournal reportedthatnearly95percentofthereported bitcointradesarefaketradesintendedtomanipulateprices.A2020studypublishedinthe JournalofFinance concludedthatnearlyalloftheriseinbitcoin pricesin2017wasduetotradingbyonelarge,unidentifiedtraderusinganother digitalcurrency,calledTether,tobuybitcoin.
Ina2021report,ResearchAffiliates,awidelyrespectedinvestmentmanagementcompany,concludedthat perhaps[bitcoin]isjustabubbledrivenbyafrenzyofretail,andsomeinstitutional, moneyeagertogetapieceoftheaction.Alternatively,andfarlikelierinmyopinion,is thatthis“bubble”ismorefraudthanfrenzy.
OnAugust3,2021,theheadoftheSecuritiesandExchangeCommission(SEC) saidthatcryptocurrencymarketswere“rifewithfraud,scamsandabuse.” InJune2022theU.S.DepartmentofJusticechargedsixindividualswith cryptocurrencyfraud.AsIwritethis,alotofpeoplearewaitingformoreshoes todrop.
Figure I.3 showstherun-upinbitcoin’spricein2017,culminatingina peakpriceof$19,497onDecember16,followedbysharpdecline.Therewas noreasonforthisupanddownotherthaninvestorspeculationand/ormarketmanipulation.IthappenedagainonMonday,April1,2019,asthevolume ofbitcointradingmorethandoubledandthepricejumped17percent.The rallywasconcentratedinaone-hourintervalwhenthepriceleapt21percent between5:30a.m.and6:22a.m.Londontime.Wholetthefoolsout?OneplausibleexplanationwasanarticlewrittenasanAprilFool’sjokereportingthatthe SEChadheldanemergencymeetingovertheweekendandvotedtoapprove
twobitcoin-basedexchangetradedfunds(ETFs).Fortruefools,ithardlymatteredwhatsparkedtherally.Aslongaspricesaregoingup,foolswillbuyin hopesofsellingtobiggerfools.
Afteralull,bitcoinpriceandvolumetookoffagaininlateOctober2020. Whenitwillend,nooneknows.Butitwillend—badly.Atsomepoint,the supplyofgreaterfoolswilldryup,themanipulatorswilldumptheirbitcoin, andthebitcoinbubblewillendthewayallbubblesend.Today,welaughatthe Dutchwhopaidthepriceofahouseforatulipbulb.Futuregenerationswill laughatusforpayingthepriceofafancycarforliterallynothing.
TorturingDatatoPredictBitcoinPrices Thefactthatchangesinbitcoinpricesaredrivenbyfear,greed,andmanipulationhasnotstoppedpeoplefromtryingtocrackthesecretofbitcoinprices. Empiricalmodelsofbitcoinpricesareawonderfulexampleofdatatorturing becausebitcoinshavenointrinsicvalueand,so,cannotbeexplainedcredibly byeconomicdata.
Undauntedbythisreality,aNationalBureauofEconomicResearch(NBER) paperreportedthemind-bogglingeffortsmadebyYaleUniversityeconomics professorAlehTsyvinskiandagraduatestudent,YukunLiu,tofindempirical patternsinbitcoinprices.
TsyvinskicurrentlyholdsanendowedchairnamedafterArthurM.Okun, whohadbeenaprofessoratYalefrom1961to1969,thoughhespentsixofthose eightyearsonleavesothathecouldworkinWashingtonontheCouncilofEconomicAdvisorsasastaffeconomist,councilmember,andthenchair,advising presidentsJohnF.KennedyandLyndonJohnsonontheireconomicpolicies. HeismostwellknownforOkun’slaw,whichstatesthata1percentage-point reductioninunemploymentwillincreaseU.S.outputbyroughly2percent,an argumentthathelpedpersuadePresidentKennedythatusingtaxcutstoreduce unemploymentfrom7to4percentwouldhaveanenormouseconomicpayoff.
AfterOkun’sdeath,ananonymousdonorendowedalectureseriesatYale namedafterOkun,explainingthat
ArthurOkuncombinedhisspecialgiftsasananalyticalandtheoreticaleconomistwith hisgreatconcernforthewell-beingofhisfellowcitizensintoathoughtful,pragmatic, andsustainingcontributiontohisnation’spublicpolicy.
ThecontrastbetweenOkun’sfocusonmeaningfuleconomicpoliciesand Tsyvinski’sfar-fetchedbitcoincalculationsisstriking.
LiuandTsyvinskireportcorrelationsbetweenthenumberofweeklyGoogle searchesforthewordbitcoin(comparedtotheaverageoverthepastfourweeks) andthepercentagechangesinbitcoinpricesonetosevenweekslater.Theyalso lookedatthecorrelationbetweentheweeklyratioof bitcoinhack searchesto bitcoinsearchesandthepercentagechangesinbitcoinpricesonetosevenweeks later.Thefactthattheyreported bitcoin searchresultslookingbackfourweeks andforwardsevenweeksshouldalertustothepossibilitythattheytriedother backward-and-forwardcombinationsthatdidnotworkaswell.Dittowiththe factthattheydidnotlookbackfourweekswith bitcoinhack searches.They evidentlytorturedthedataintheirquestforcorrelations.
Evenso,onlysevenoftheirfourteencorrelationsseemedpromisingforpredictingbitcoinprices.OwenRosebeckandIlookedatthepredictionsmadeby thesecorrelationsduringtheyearfollowingtheirstudyandfoundthatthey wereuseless.Theymightaswellhaveflippedcoinstopredictbitcoinprices.
LiuandTsyvinskialsocalculatedthecorrelationsbetweenthenumberof weeklyTwitterbitcoinpostsandbitcoinreturnsonetosevenweekslater.Unlike theGoogletrendsdata,theydidnotreportresultsfor bitcoinhack posts.Three ofthesevencorrelationsseemeduseful,thoughtwowerepositiveandonewas negative.Withfreshdata,nonewereuseful.
Theonlythingthattheirdataabuseyieldedwascoincidentalstatisticalcorrelations.EventhoughtheresearchwasdonebyaneminentYaleprofessorand publishedbytheprestigiousNBER,theideathatbitcoinpricescanbepredicted reliablyfromGooglesearchesandTwitterpostswasafantasyfueledbydata torturing.
Theironyhereisthatscientistscreatedstatisticaltoolsthatwereintended toensurethecredibilityofscientificresearchbuthavehadtheperverseeffectofencouragingresearcherstotorturedata—whichmakestheirresearch untrustworthyandunderminesthecredibilityofallscientificresearch.
DataMining Traditionally,empiricalresearchbeginsbyspecifyingatheoryandthencollectingappropriatedatafortestingthetheory.Manynowtaketheshortcutof lookingforpatternsindataunencumberedbytheory.Thisiscalled datamining inthatresearchersrummagethroughdata,notknowingwhattheywillfind.
Waybackin2009,MarcPrensky,awriterandspeakerwithdegreesfromYale andHarvardBusinessSchool,claimedthat
Inmanycases,scientistsnolongerhavetomakeeducatedguesses,constructhypotheses andmodels,andtestthemwithdata-basedexperimentsandexamples.Instead,they canminethecompletesetofdataforpatternsthatrevealeffects,producingscientific conclusionswithoutfurtherexperimentation.
Wearehard-wiredtoseekpatternsbutthedatadelugemakesthevastmajority ofpatternswaitingtobediscoveredillusoryanduseless.Bitcoinisagainagood example.Sincethereisnologicaltheory(otherthangreedandmarketmanipulation)thatexplainsfluctuationsinbitcoinprices,itistemptingtolookfor correlationsbetweenbitcoinpricesandothervariableswithoutthinkingtoo hardaboutwhetherthecorrelationsmakesense.Inadditiontotorturingdata, LiuandTsyvinskiminedtheirdata.
Theycalculatedcorrelationsbetweenbitcoinpricesand810othervariables, includingsuchwhimsicalitemsastheCanadiandollar–U.S.dollarexchange rate,thepriceofcrudeoil,andstockreturnsintheautomobile,book,andbeer industries.YoumightthinkIammakingthisup.Sadly,Iamnot.
Theyreportedfindingthatbitcoinreturnswerepositivelycorrelatedwith stockreturnsintheconsumergoodsandhealthcareindustriesandnegativelycorrelatedwithstockreturnsinthefabricatedproductsandmetalmining industries.Thesecorrelationsdon’tmakeanysenseandLiuandTsyvinskiadmittedthattheyhadnoideawhythesedatawerecorrelated:“Wedon’tgive explanations .Wejustdocumentthisbehavior.”Askepticmightask:What isthepointofdocumentingcoincidentalcorrelations?
Andthatisalltheyfound.TheAchillesheelofdataminingisthatlargedata setsinevitablycontainanenormousnumberofcoincidentalcorrelationsthat arejustfool’sgoldinthattheyarenomoreusefulthancorrelationsamong randomnumbers.Mostfortuitouscorrelationsdonotholdupwithfresh data,thoughsome,coincidentally,willforawhile.Onestatisticalrelationship thatcontinuedtoholdduringtheperiodtheystudiedandtheyearafterward wasanegativecorrelationbetweenbitcoinreturnsandstockreturnsinthe paperboard-containers-and-boxesindustry.Thisissurelyserendipitous—and pointless.
Scientistshaveassembledenormousdatabasesandcreatedpowerfulcomputersandalgorithmsforanalyzingdata.Theironyisthattheseresourcesmake
itveryeasytousedataminingtodiscoverchancepatternsthatarefleeting.Resultsarereportedandthendiscredited,andwebecomeincreasinglyskeptical ofscientists.
LookingForward Thethreecentralreasonsforthecredibilitycrisisinsciencearedisinformation,datatorturing,anddatamining.Ichoseexamplesrelatedtobitcoinfor thisIntroductioninordertoillustratethecrisis.Bitcoinishardlyanisolated case.Ichoseitbecauseitissoclearthatbitcoinbelieversdon’ttrustauthorities andbecauseitsotemptingtotortureandminebitcoindata.Thechaptersto comewillexpandontheseargumentsandgiveexamplesfromawidevarietyof fields.
Disinformation Theideathatscientistsareatoolusedbytherulingclasstocontrolushasreal consequences.Vaccinesforpolio,measles,mumps,chickenpox,andotherdiseaseshavebeenlifesaversformillions,yetsomepeoplebelievethatvaccines maybepartofanefariousgovernmentplottoharmusorspyonus.BritonAndrewWakefieldisthesourceofthenowdebunkedclaimthattheMMRvaccine causesautism.Journalshaveretractedhisresearchandhehasbeenbarredhim frompracticingmedicineintheUnitedKingdom,yetcelebritiescontinueto spreadhiswildlyirresponsiblefabricationsthroughouttheInternet.
So,too,withdangerousfalsehoodsaboutCOVID-19vaccines.Itissad enoughthatpeoplewhobelievetheseuntruthsrisktheirlives,buttheyalso endangerothers.HerearesomeInternetresponsestoaMarch2021CNBC newsstoryaboutCOVID-19vaccinations:
Flushotsareproventomakeyou38%morelikelytocatchanotherrespiratoryvirus likecovid.
SCAMDEMIC IwilldowhatIwant.Iwillalwaysbefree.Dearcommunist,I’mnotsorry Easywaytotargettheelderly.Don’tbefooledpeople.
Iwontvaxiwontmaskiwontfollowmandatesorguidelinesandimarmed.
RichardHorton,editorofthemedicaljournal TheLancet,hasnotedtheparadoxbetweenU.S.scientificachievementsandthepublicdistrustofscientists:
Noothercountryintheworldhastheconcentrationofscientificskill,technicalknowledgeandproductivecapacitypossessedbytheUS.Itistheworld’sscientificsuperpower barnone.Andyetthiscolossusofscienceutterlyfailedtobringitsexpertisesuccessfully tobearonthepolicyandpoliticsofthenation’sresponse.
DataTorturing Datatorturershavepublishedarticlesinthe BritishMedicalJournal reporting thatitisdangeroustodriveonFridaythe13th,thatAsian-Americansaremore likelytohaveheartattacksonthefourthdayofthemonth,andthatsurgeries aremorelikelytobefataliftheyaredoneonthesurgeon’sbirthday.Topjournalshavealsopublishedresearchbyrespectedscientistsclaimingthatpregnant womenwhoeatbreakfastcerealdailyaremorelikelytohavemalebabies;peoplecanbecuredofdeadlydiseasesbydistanthealing;andthatpeopledobetter ontestsiftheystudyforthetest after takingit.Theridiculousnessofsuch conclusionscanonlyunderminerespectforscience.
DataMining Manybelievethatcomputervictoriesoverhumansinchess,Go,Jeopardy,and othergamesdemonstratethatcomputershaveprogressedsofarbeyondhuman capabilitiesthatweshouldrelyontheirsuperhumandata-miningprowessto makeimportantdecisionsforus.
Nope.Computeralgorithmsareterrificdata-miningmachinesbuttheyare notintelligentinanymeaningfulsenseoftheword.Indeed,theydonotunderstandwords,includingintelligent.ComputeralgorithmsarelikeNigelRichards, whohaswonseveralFrench-languageScrabblechampionshipswithoutknowingthemeaningofthewordshespells.
Ifadata-miningalgorithmburrowedthroughDonaldTrump’stweetsand foundastatisticalrelationship(andonedid)betweenTrumptweetingtheword withandthepriceofteainChinafourdayslater,itwouldhavenowayofassessingwhetherthatcorrelationwasmeaningfulormeaningless.Nordoalgorithms haveanywayofknowingwhetheritissensibletohireaperson,approvealoan, orpredictcriminalbehaviorbasedondata-minedcorrelations.Yettheyhave beenusedforalloftheseandtheirfailureserodethecredibilityofscientific research.
The Irony Thesethreecomponentsoftheassaultonsciencewerecreatedandfueledby scienceitself.Thedisinformationpromotedbythosewhodon’ttrustscienceis spreadfarandwidebytheInternetthatsciencecreated.Thedatatorturingthat isunderminingtheintegrityofscienceistherationalresponseofscientiststo thedemandforempiricalevidence.Thetemptationtominedataisdifficultto resistbecauseithasbeenmadesoeasybythemountainsofdataandpowerful computersthatscientistscreated.
Itwillbehardtofendofftheseassaultsonscience,butitisabattleworth fighting.
PARTI Disinformation 
