Nov 202013

Experts are a major source of soft evidence. The strength of the evidence is defined by their perceived accuracy, i.e. the observer’s confidence in using experts as a sign for evaluating the truth of some hypothesis. This is ultimately a matter of trust. Since no expert is infallible, i.e. perfectly accurate, none is fully trusted. Scrupulous experts are aware of their level of accuracy and apportion their confidence accordingly. Unscrupulous experts are overconfident: their confidence exceeds their accuracy.

Experts claim legitimate recognition when they are right. But measuring their accuracy also requires recognizing when they are wrong. Unscrupulous experts trumpet their good calls and brush their bad calls under the carpet.

Three years ago (HT Barry Ritholtz), just after the FED announced QE2, Ben Bernanke received an open letter, signed by respected academics, economists, asset managers and other prominent experts, warning of the risk of “currency debasement and inflation”. Had they been proven right, you can be sure you would have heard their ‘I told you so’ loud and clear. But they were wrong. After three years, there was no inflation and none is in sight. Do we hear any apology, admission of error, expression of regret? Nothing. Not even a ‘oops!’.

Paul Krugman, who has been notably on the right side of this issue, makes the same point:

After all, if you write about current affairs and you’re never wrong, you just aren’t sticking your neck out enough. Stuff happens, and sometimes it’s not the stuff you thought would happen.

So what do you do then? Do you claim that you never said what you said? Do you lash out at your critics and play victim? Or do you try to figure out what you got wrong and why, and revise your thinking accordingly?

He mentions a few of his own big mistakes: downplaying the importance of the liquidity trap in Japan in 1998; overplaying the loss of confidence in US in 2003; calling a euro crisis in more recent times – although on this one he persists in saying he has been wrong so far, despite calling it more than three years ago!

And he forgets to mention another major blunder: calling for the nationalisation of big US banks. It was February 2009…

Anyone who has been persuaded into fearing a burst of uncontrollable inflation following Quantitative Easing should chill out, eat a piece of humble pie and learn from the Chairman:

It is a brilliant four-part lecture series delivered by Bernanke at George Washington University School of Business in March 2012. It is also available in book format.

By the way, the open letter to Bernanke was also signed by Seth Klarman. Nobody is perfect.

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  One Response to “Nobody is perfect”

  1. I’ve really enjoyed your writing. Thanks for all your work!

    That being said, I don’t really think there’s anything wrong with the letter, and it seems like this is a terrible example on which to make your point about expertise and confidence. (In fact, it may demonstrate the opposite: why not view Bernanke and pro-QE advisors as the “experts” making overconfident predictions?)

    The writers said they thought QE:

    – risk[ed] currency debasement and inflation,

    – was not likely to achieve the Fed’s objective of promoting employment, and

    – would distort financial markets and complicate efforts to normalize policy.

    There seems to be agreement that QE has only had limited effectiveness in promoting employment., We don’t have a way of evaluating what would have happened to the economy in the intervening period without QE, and if we would have possibly even preferred that outcome.

    QE has certainly distorted financial markets and efforts to normalize policy seems quite complicated indeed. Whether or not currency debasement has occurred is a matter of discussion and inflation has certainly not occurred, but what risks have we run up to this point, and is it not likely that we’ve introduced risks whose implications we do not understand?

    Let’s say a medical expert advised you against a treatment because he thinks you’ll probably get over the illness on your own, and he estimates that you run 10% risk of extraordinary complications from a medical procedure. If you took the treatment but didn’t observe the side effect, was he wrong to give you that advice?

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