Father of Behavioral Economics; Recipient, 2017 Nobel Memorial Prize in Economic Science; Director, Center for Decision Research, University of Chicago Graduate School of Business; Author, Misbehaving

I recently posted a question in this space asking people to name their favorite example of a wrong scientific belief. One of my favorite 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 19th century theories and undetectable by 19th 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 that were able to "explain" some otherwise ornery facts. Consider this quote from Max Pettenkofer, the German chemist and physician, is disputing the role of bacteria as a cause of the cholera. "Germs are of no account in cholera! The important thing is the disposition of the individual."

So in answer to the current 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 above to see how it works.

Often Aetherists (theorists who rely on an Aether variable) think that their use of the Aether concept renders the theory untestable. This belief is often justified during their lifetimes, but then along comes clever empiricists such as Michelson and Morley and last year's tautology become 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 a straight face 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.