Experts, Crashes, Media, Skepticism

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 [philosopher] 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

Be more skeptical of sources. “You have to play lawyer, ask what is this person’s motivation for saying what they’re saying.” The best reporting on the automobile industry’s true financial predicament was at an upstart Detroit Web site that supplies unvarnished automotive reviews and editorials about the industry, The Truth About Cars. “They understood the business and its challenges; they were railing for several years against the unsustainable nature of the capital structure of the Big 3,” he says.

Question data, constantly. Last March, for example, The Wall Street Journal ran a story saying the vast inventory of foreclosed homes was starting to bring people back into the housing market, and cited figures from the National Association of Realtors showing a jump in sales in February of 2.9% from the month before. But he points out that in every year home sales are lowest in January, so changes from January to February are measuring seasonal differences, not actual improvements in house sales. The tendency to overemphasize the most recent data point in a monthly series is called the “recency” effect. “It is a foolish way to ignore the trend and give greater emphasis to today,” he notes.

Give good context. The struggle to control the narrative of how the housing crisis and ensuing financial meltdown occurred is in full swing, exemplified by Karl Rove’s op-ed in the Wall Street Journal in January that fingered Fannie Mae and Freddie Mac as among “the principal culprits of the housing crisis.” But he and others point out that the two government-sponsored enterprises, though they became too large and overleveraged, had nothing to do with the explosion of high-risk lending that took place between 2002 and 2007.

Both articles are thought provoking and worth exploring . . .

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Sources: Why the experts missed the crash Eric Schurenberg Money Magazine, February 18, 2009: 4:10 PM ET http://money.cnn.com/2009/02/17/pf/experts_Tetlock.moneymag/index.htm

Expert Tips on Covering the Financial Crisis Barbara Bedway Editor & Publisher, February 18, 2009 12:01 AM ET http://www.editorandpublisher.com/eandp/news/article_display.jsp?vnu_content_id=1003942139


Originally published at The Big Picture blog and reproduced here with the author’s permission.

One Response to "Experts, Crashes, Media, Skepticism"

  1. Andrew G. Bernhardt   February 21, 2009 at 9:17 am

    Here’s why we’re on the brink of a total financial catastrophe and economic collapse of the United States of America (and other countries), and what I describe as a global Greater Depression and/or the Great Slump…A) The previous Executive Administration and the 110th Congress, George Bush, he wrote 750 billion dollar deficits per year (taking the federal gov. debt outstanding from 4.8 trillion to 10.6 trillion; which still excludes state, county, municipal, metropolitan, city, and local debt, corporate, agency, and private sector debt too). This crowded out investment, crowded out borrowing, and incited a credit crunch, and diverted money away from the real estate markets, both residentially and commercially (as well as other markets, including the currency market, stock market, CMO and CDS markets, and commodities markets). It also diverted money away from the currency markets, stock markets, and other markets. Oh, and if you include 5.4 trillion dollars of debt the US Gov. has assumed of the failed GSEs then the total debt is now 16 trillion, up 11.2 trillion over the Bush Administration (from 4.8 trillion to 16 trillion)!!! If you calculate it this way, including the GSE failure (government sponsored enterprise failure), then 1.4 trillion was borrowed annually during the 8 years of the Bush Administration. Doesn’t this crowd out investment and borrowing?!?!?!B) The totally financial negligent Congress, (all 435 imbeciles, senators, and representatives) they validated, ratified, and approved of Bush Administration’s massive deficit spending spree— for a war against a single terrorist, Osama Bin Laden, hiding in a cave in the mountains of afghanistan, and also the sovereign state of iraq. The cost of the war, and thus the Dept. of Defense’s budget is too large to even write down without making everyone barf!!!C) Eventually, with the severe crowding out of borrowing, this diverted enough money away from the securities markets, CDSs, CMOs, the US dollar, stock markets, and especially real estate. And on a global basis!!! I guess the world is awash in the Treasury market— everyone and even the grandkids own them now, or vice versa, everyone and their grandmother owns them now!D) The negligent Congress also created a new rule change, and allowed the banks to lend zero percent down style. Lame. Anyone that could take their thumb out of you-know-where, and if they could point at a house, they could have it, zero percent down! Why didn’t anyone decide (but only of course if they had, no income, no job, and no assets) to purchase zero percent down style, 5th Avenue, 6th Avenue, and 7th avenue for example, in downtown lower Manhattan?? Secondly, other totally stupid rule changes included FAS and FASB rule changes, involving how large time entities and corporations valued various types of securities (leve III assets), forcing them to use something called “mark to market” type accounting on their balance sheets. This dramatically changed the balance sheet figures. Our future will also be riddled with reckless, hasty, stupid and most likely totally ridiculous new rules, and rule changes, regulations, and legislation regarding anything savings and investment related, including banking, brokerage and finance type laws— enough to make anyone’s stomach ache! The Congress sure introduces and creates a bunch of BS eh?E) With real estate depreciating rapidly now, banks are being smashed across the board, because they collateralized the mortgage risk (something else the Congress allowed them to do), and traded it, from themselves to each other, and with their losses materializing rapidly, their income statements, balance sheets, and cash flow statements turned sour rather rapidly. Losses most likely will surface around $4-trillion-five-hundred-billion. Investors, panicking that the vast majority of all banks globally would fail (after seeing the materialization of their disgusting income statements, and balance sheets after Q1 of 2008), panicked and liquidated their stock holdings, dragging down the stock indices globally, at rates not seen in a very very long time! Volatility also increased rather rapidly to highs never before seen. The losses have been, are, and will be enormous! People have and will lose all confidence in the banking sector, and the Government. The banks get closer and closer to total insolvency everday!F) The Congress now pretends that borrowing more money in Economic Stimulus Packages, T.A.R.P. (troubled asset recovery program) funds, bailouts, capital infusions, capital injections, backstops, etc. will somehow be good, and also will amount to more than $1 dollar of GDP growth for each $1 of Gov spending! Stupid!!! Each dollar costs money, and is borrowed funds, if borrowed at 4%, then each dollar borrowed is reduced to only 0.96 per year of GDP at best! The gov. spending (denoted as “G” in the GDP equation) is spent and taxed also, taking it from 1.00 to maybe 0.70 at the corporation (who hordes money for taxes due to uncle sam himself) that won the Government Contract, where or how do they claim that each dollar is 1.57 e.g. of GDP growth!?!?!? Regardless these rather hasty government reckless spending sprees, they merely crowd out investment, and crowd out borrowing even more, exacerbating the problem further. How does borrowing more, help to solve a problem induced from too much borrowing in the first place?!The Government is to blame— no one else is! There is on one else to blame literally. The President writes (and wrote) the Federal Budget! The Previous Administration, George Bush, and his lame budgets, and the entire Congress, and their inability to discourage the President from writing huge deficits (over the past eight years) was the entire source of the economic mayhem and total capital market’s catastrophe we’re currently experiencing globally. Duh, deficits matter folks! It’s (always) the economy stupid! Deficits matter, inflation matters, real gdp, and nominal gdp growth matters, interest rates matter too, and numerous labor force figures matter also, even wages and productivity matter! Even the total government debt outstanding matters, as does the debt service. Lots of things matter. I would claim the entire world’s economic and capital markets chaos is a rational and logical response to the Bush years, and the federal budget deficits they brought— for the entire world to finance, and hence lend to the USA. We’re not borrowing from the future generations, we’re borrowing instantaneously from the foreigners who lend to us, and then we owe them streaming income (in Treasury bill, note, and bond) interest every six months. With nearly 11 trillion of debt of the Fed Gov. alone, that’s a lot of interest to pay constantly!!!I would even claim that the fertility rate (which has fallen off a cliff in the past 30 years), birth rate (which has fallen off a cliff in the past 30 years), and age of first marriage matters (which has risen significantly in the past 30 years)— and no one else really cares. Weird to me. The family unit has deteriorated over the past 30 years, divorce rates are sky-rocketing too. With the popularity of intra-uterine-devices and birth controls widespread usage among the younger age stratum women have become more interested in university diplomas seemingly— and jokes about viagra, levitra, and cialis and how maybe they’ll want it when they’re 90. Another thing I have noticed is that apparently the department of education has failed again. Just look at how idiotic, imbecile like, and moronic the entire Congress (judicial branch and executive branch too) is— with their advanced degrees from, ha, ha, the world’s best and most prestigious educational institutions! Also, the cost of an education is enormous!… if people only didn’t go to college, if they saved it, lets say 80k of tuition and living expenses (rent and food, and tuition over just four years!), and if they were plumbers, historians, laid the concrete for the federal highway, air traffic controllers, court reporters, or even garbage men/women, ultra sound technology therapist, at a salary of $56,000 of earned income (for even garbage collection), then think of the savings they’d have!!! And if people used their noodles and knew the income levels of the other occupations I listed above they’d pull all their hair out and scream! They’d sure be better off!!! They’d be much more well off than their college graduate, and/or graduate school counterparts. Apparently, the benefits of a so called education are seemingly so costly, I wonder a lot how much time it takes the average individual to catch-up and actually reap the benefit of getting their degree(s). If they attend graduate school, law school, or graduate school for an MBA, or PhD, or for medical school, the opportunity cost of such a decision is even more enormous!!! The cost is further complicated, more complex, and more costly if e.g. recessions strike and investment results are negative (as they have intensely been as of late). Sure makes the case for Treasuries— and I like TIPS best, treasury inflation protected securities; with principal that’s adjusted to the CPI-U, and the real yield is then applied to the adjusted principal, making for increased principal over time and even increasing coupons over time, assuming inflation over the long run, which historically since 1929 to the present has been approximately +3.26%, or historically from 1950 to the present has been approximately +3.88%— with the current real yield curve where it is, who wants equities?! Who wants regular Treasuries compared to TIPS?? If people only used their “noodle,” and invested money that otherwise would have been diverted away to colleges and universities (usually borrowed money at that), and if their kids had only become garbage men/women, think of the difference in savings and investment, debt levels, and their kid’s earned income! College can be 80k, law school 171k, and seven years down the toilet too! Garbage men in NYC make nearly 80k to 100k, and seven years of that is 560k to 700k and they’d have no educational debt either! The difference is a mere 950k, and the educational institutions try to claim that a million dollar difference happens in income if you do not attend college, when the reverse is actually true!!! Maybe there’d be some kind of “rotten” baby boom too for these garbage people! More babies is good for social security— more people in the labor force to tax at the payrolls level.Total Default here we come, a default not only of the US Dollar, but also of the US Debt (the USA’s government bills, notes, and bonds), and soon! All the banks, brokerages, insurance, and reinsurance companies will fail miserably and are totally insolvent— bringing about the failure of everything else, as economic activity grinds rapidly to a total and complete halt! We’re in for a doozy of a recession, bartering, maybe some riots, a dramatic increase in the crime rates, a rebellion, a civil war, maybe a revolution, and a global financial capital markets catastrophe— bringing about a global depression, famine, starvation, and dehydration. Eventually, maybe the USA will be invaded by the Mexicans, the Canadians and peacefully, to keep the peace, deliver food and water, in a huge humanitarian effort for all 300 million poor Americans.Americans were in the past among some of the highest per capita GDP in the world, but not because they know or knew how to make money, no no, no no, they are only good at borrowing money (from Japan, UK, Cayman Islands, Luxemburg, and China) and schlooshing it around, from themselves to each other! Makes me wonder why foreigners lend so readily to the USA!!! If they only kept their own hard earned capital and savings for themselves, think how great their own nations would be?!I guess we (the entire world’s people we) can literally just thank the previous administration, George Bush, for basically, borrowing too much money (from foreigners- Japan, the UK, Cayman Islands, Luxemburg, and China) for bad causes— and for creating this economic, financial, and capital market chaos. Bush was basically, up to no good! Seems as though George Bush, republicans, and maybe even MBAs (since George W. Bush has an MBA), maybe they all want to practice socialism, and to socialize everything, and make it state run and/or government run, rather than free market capitalism. How lame! I much prefer free market capitalism. Perhaps, Republicans have always just stood for war, regress, and recession, and reckless spending sprees, and for doing the wrong thing? Perhaps, the Republicans want to ruin everything possible that’s important and then coincidentally the government feels as though it has to “take it over” rather than let it fail— also a mistake. I say let it (where “it” is risk takers, banks, other ailed corporations) fail!!! Merging a bunch of failing corporations is not good either, it is bad, it does not bring about competition, and competition is good, mergers brings about monopolies, which I think are bad sometimes. I like spin-offs, divestitures, not mergers and acquisitions. Otherwise, we should all get Government Bailouts! Just kidding, I have a major laissez-faire approach! This government taking over everything in a bail-out mindset is practically communism, and totally financially negligent to me! The government with its bailouts, is fostering the conditions which have created the next Great Depression, what I call The Greater Depression and/or The Greater Slump. And why do all the banks themselves get to have their losses reimbursed?! Why can’t all the people have their losses reimbursed?!What will become of the fallout of the Bush administration?! Will there be malicious maniac heads of state abroad, in foreign countries, that rise to power, in the near future, in tough economic times, going through this economic depression (I call it “the Greater Depression”)? Hitler, Stalin, Mussolini, Hirohinto, Castro, etc. come to mind. Will World War III begin? I fear for out future. Clearly, the fallout of the Bush Administration will be long lasting and may last at least ten years!I hope we can find change, in that the USA and its people may someday, be able to foster the conditions and environment of legislative responsibility and congressional responsibility! Fiscal and monetary responsibility would be nice too.The next shoes to drop include, A) Munis, B) States, C) Sovereign entities, D) Dividends, E) PEs are I’m afraid way too high in the USA at the current 12 to 15, they need to be more like 6 to 7— and earnings are decreasing still!, F) Corporate defaults. TIMBER!!! Dow Jones Industrial Average 4k here we come!!!I would like to know why the Congress has done the following?A) Limited executive pay… great, now even more talent will leave the country— is this limit adjusted for inflation??B) Why doesn’t the Congress limit its own pay? They incited the entire economic mayhem by crowding out investment and borrowing— why not limit their Congressional pay?? The entire congress, and the president should have to be “dime men” again, like they were after WWII (since they borrowed so much). They (the Congress) should have to limit their own pay to a single dime per year.C) Why did they validate the constitution, the right to bear arms is lame as hell! Coincidentally, so is the entire constitution. It should be torn up! The violent crime rates threaten the coherence of the USA.D) Why did the congress validate, ratify, and approve of the previous administration’s federal budget deficits for wars against a terrorist in a cave in the mountains of afghanistan (osama bin laden) and the pathetic sovereign state of iraq?E) Why didn’t even 1 congressman or woman, why didn’t they start a debate about George Bush’s crowding out of investment and borrowing, in his massive deficit spending spree?? Why didn’t anyone get angry with the previous administration’s BS regarding “deficits don’t matter!” Why did the Congress so readily approve of the previous administration’s deficit spending?F) Why is the solution of the current administration and congress, why is borrowing more money, for bailouts (and other terms for it, like TARP, etc), why is borrowing more money (from foreigners) the solution to too much borrowing to begin with?? Why more deficit spending?? Why are they rewarding idiocy, and failure companies?? Why are banks being reimbursed for losses?? Why can’t the people the reimbursed for their losses??G) Why doesn’t the government try laissez-faire, and stay out of our lives?? They incited the entire economic and capital markets failure— why look to them for help??H) Why do foreigners so readily lend money to the USA?? Lets face it, it’s NOT the taxpayers problem for all these bailouts! It’s the foreigners, who will now have to lend, even more money to the USA. Pathetic. Why do they lend so much all the time to the USA??I) Why did the Congress terminate the downtick rule? Why did the congress (the legislative branch) allow 0% down on real estate?? Why did the congress approve of rule changes regarding FAS and FASB rules relating to the quantification of level III assets (on the balance sheets) of large time entities and corporations and institutions?? Why does everyone look to the congress for some type of solution for our problems, when they have destroyed everything themselves.Anyway you look at it, most experts hedgehogs, or foxes, they just hadn’t imagined a world where the US Government would be borrowing trillions of dollars at a time for utter and complete foolishness.~ Andrew G. Bernhardt, St. Louis, MO… See this for more of my comments:http://www.google.com/search?hl=&q=+site:www.rgemonitor.com+Bernhardt,+RGE