Why the experts missed the crash... and a Wish list for reporters covering a financial crisis

[RedEarth]

By Barry Ritholtz

There is a surprisingly interesting article at Money Magazine on why so many so-called experts utterly missed the market crash, credit crisis, and housing collapse.

Its an interview with Philip Tetlock who is (with no small amount of irony), an expert on experts. He is a professor of organizational behavior at the University of California-Berkeley’s Haas Business School, and has been studying experts for 25 years.

“But you shouldn’t simply write all gurus off. Tetlock’s research found that one kind of expert turns out consistently more accurate forecasts than others. Understanding what makes them better can help you make more reliable predictions in your own life. Tetlock explained it all to Money’s former managing editor, Eric Schurenberg, in a recent interview. . . .

What makes some forecasters better than others?

The most important factor was not how much education or experience the experts had but how they thought. You know the famous line that Isaiah Berlin borrowed from a Greek poet, “The fox knows many things, but the hedgehog knows one big thing”? The better forecasters were like Berlin’s foxes: self-critical, eclectic thinkers who were willing to update their beliefs when faced with contrary evidence, were doubtful of grand schemes and were rather modest about their predictive ability. The less successful forecasters were like hedgehogs: They tended to have one big, beautiful idea that they loved to stretch, sometimes to the breaking point. They tended to be articulate and very persuasive as to why their idea explained everything. The media often love hedgehogs.

How do you know whether a talking head is a fox or a hedgehog?

Count how often they press the brakes on trains of thought. Foxes often qualify their arguments with “however” and “perhaps,” while hedgehogs build up momentum with “moreover” and “all the more so.” Foxes are not as entertaining as hedgehogs. But enduring a little tedium is worth it if you want realistic odds on possible futures.

Fascinating stuff.

My own thesis as to their problematic prognostications places a healthy amount of blame on the conspiracy of optimism.

And on a related note, Dean Baker and I are interviewed in Editor & Publisher magazine on what Journalists can do when interviewing these experts: What to ask, how to dig beneath the data, how to not get rolled by the spinmeisters:

Wish list for reporters covering this and future financial crises

http://www.ritholtz.com/blog/2009/02/experts-crashes/

[leftchick]

1. interesting. So why is Obama's team full of hedgehogs?

can anyone name me an adviser of his that is a fox?

[digidigido]

4. Samantha Power

[bemildred]

2. There is no mystery, the "experts" are shills and ignorant dumb shits.

There has been a continuous stream of stories and opinion pieces predicting this debacle since around when Glass-Steagall was repealed.

[Joe Chi Minh]

3. What he is actually saying is that, all things intellectual being equal (in terms of the

worldly intelligence), it all boils down to intellectual integrity, to WANTING to know the truth.

There is, I believe, a philosophical school called voluntarism postulating that, in fact, we know what we want to know. Christ's Gospel teachings are, in fact, all predicated on this.

Hence, the half-wit was, to Christ, the farmer/businessman who was so successful, he had extra barns built to accommodate his bumper harvest. The real "shrewdie" was the widow who put her last mite in the poor box.

Of course, to our minds, those examples seem a tad extreme, but there is no doubting that that is the general thrust of Christ's teachings. It wasn't that he failed to recognise the "skills" of the businessman all together. One skill he did notice that they had, was focus, the single-minded pursuit of what they wanted, pathetic and contemptible though it was, when not subordinated to spiritual priorities.

This was and still, seemingly, is, in contrast to the ambivalence of Christians, who mostly still don't seem at all persuaded that the gew-gaws of affluence are just that. The American Dream should really be called The American Nightmare. Snouts in the trough. Who's got the sharpest elbows?