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« The US Budget Deficit and the Golden Goal Posts | Main | Opinions and Information »

June 22, 2010


Rodge Bucao

Just yesterday I had an interesting debate in my history of psychological thought class that runs almost along similar lines. A classmate of mine forwarded his argument that scientists never do work that cannot be applied. I quickly shared my disagreement because research is not always about maintaining what will benefit the status quo but also to pave the way for finding knowledge that pushes the boundaries of common thought. One cannot deem a particular work as useless or useful not unless that person has sufficient knowledge and mastery to proclaim it so.


Thanks Jeff. After seeing Donald R's quote years ago, I called it "The Rumsfeld Paradox". As an IT system analysis geek, I've been fighting this every day for the last 20 years.
My solution so far was "more information" but thanks to unlimited cable channels with time to fill, and democratic Internet access, there's too much noise. Aggregating and crowdsourcing fail. Picking your own experts seems the way so far (I really like your criteria #2 and #3). Is it best to pick 2-3 sources and ignore the rest?


In all honesty, it's just too difficult to build a model describing our economy and it's increasing complexity. I would suggest limited economic forecasting, and only those things that can be modelled.

Most economic modelling just follows the herd. Is there one Wall Street analyst predicting a down market this year? I know it's bad for business to suggest such a thing, but it's naive to not at least assume it could happen (it's 2006 and housing prices can't fall can they???).

I sat in a talk by Joseph Stiglitz (not my favorite economist really, I like Shiller) who described the IMF as not modeling in the effect of monetary policy. I mean wtf?

Following up on Shiller, it's extremely difficult to model in animal spirits. For example, how is it people are modelling in growth for Europe? They are creating a massively deflationary environment that could crimp growth for years (all becuase of the fear of Weimar, when they should fear a Japanese period instead).

I guess I would say: What do we really gain from crowded herd economic forecasting? I don't see it.


Great post as always, thanks for provoking some thought. For me, it boils down to whether I have room to consider the opinion of an "expert". I don't doubt credentials, but I often doubt the relevance of any one opinion as well as my ability to absorb the information into a profitable plan. With an infinite supply of sources, I tend to focus my consumption on process-oriented advice and let market action steer me in planning outcomes. You do a great job of respecting both, hence your work ranks higher on my consumption scale.


While on the one hand, dismissing commentators or refusing to budge from your position as it doesn't support your own bias is a well studied case in psychology. I think what you're missing is the public dissemination of information by "experts" which are not held to any real accountability, is suspect. In many if not most there is often an agenda. A money manager talking his book, or steering the masses ala Soros and his gold comment. "Experts" cant escape YouTube..Barney Frank and his "I'm willing to roll the dice on housing" speech in 2004. Maxine Waters speech in 2005 "If they ain't broke, why you trying to fix em'" comment about Fannie and Freddie. Or how about Kudlow's "goldilocks" economy pitch along with other ala 2006-2007. Or the best, Bernanke's classic Youtube clip of "Subprime and housing defaults will not exceed 40Billion and will not spill over into other areas of the credit market"....Maybe I misunderstand your post, but as Maxine says "I ain't buyin it"...


Mike C -- Concerning the first case, they are all experts. Koo might be most expert on a specific topic, and he is gaining attention. The relevance of his viewpoint may be especially important in the next year or two. Many support the indicated policy.

Even if this were not true, I never stated that identifying experts would answer all of our questions. In the avalanche of information, it helps to have a filter. I recommend filtering out people who tell you that economics (or forecasting, or behavioral psychology, or political science, or research methods, or modeling) is irrelevant to the discussion when they themselves lack the relevant background. That is precisely what the theory points out.

I'll circle back to point 2 after I consult my copy of the book (which is at home) and can review the BofA report.

Thanks for the links.


Mike C

2 questions related to themes in this post:


"Well, the U.S. government hasn't invited me to do anything directly - yet. However, I go to Washington once a year because I used to have a very generous doctoral fellowship from the Board of Governors of the Fed in the early '80s, and it is my way of paying back that debt. Every year, I give a presentation to the Fed. I must say that for a long time, ever since I started talking about this concept of a balance sheet recession, I was bashed and bashed and bashed, every time I'd give a seminar at the Fed. Only in the last three years or so have they begun saying, maybe you are right that this kind of thing can actually happen. But many Fed staffers now are aware of my argument and what has to be done to deal with balance sheet recessions. Meanwhile, the CSIS, the Center for Strategic International Studies, which is really more of a national security, rather than an economic, think tank, has also invited me to present at two big events it has sponsored in Washington. The most recent, last year, exposed a lot of Congressional staffers to my ideas. So, at least some people in the capital are aware of what I have been saying. What's more, I've recently seen a major change in tone from Larry Summers, the director of the White House National Economic Council.

How does one identify the real expert here? Is it Richard Koo? Or is it the Fed staffers and Larry Summers who consistently rejected his analysis and recommendations? In other words, when we are dealing with a group all of whom have the right credentials yet have viewpoints that are 180 degrees apart, how does one assess the expertise?


"We aren’t entirely surprised. Virtually the entire analytical community has been trained to believe that any and all quantitative approaches to forecasting must involve models, i.e., simplified representations of reality. The idea that there could be rigorous quantitative approaches that are not model-based seems to be entirely beyond their ken. Their understanding of analytical techniques is so model-soaked that it reminds us of an insightful comment from psychologist Daryl Bem: “It takes a very intelligent and non-parochial fish to realize that his environment is wet.”

How should I intepret these comments? Is Mr. Achuthan a qualified expert?


John -- We are both experienced with the options world where it is possible to adjust pricing models to fit the actual distributions. In fact, that was one of my jobs for CBOE market makers in the OEX.

I am working on an article on this topic, so I am especially interested in your comment.

If you change the environment to an economic forecast, the problem is quite different. Knowing that you have a "fat tail" for example, will not necessarily change your forecast. It changes the error band, however you define that. There may be a significant chance of a large "event". but that also does not fit a forecast.

So -- if you and I were to improve on standard economic forecasting, what would we suggest?

Most importantly, you know enough economics to engage in constructive critical thinking. Most of the 'pop economist' crowd dismisses the real economists because it reduces discussion to slogans and anecdotes -- their weapons of choice :)

Thanks again!



Russ -- It is fine to be skeptical of experts and to use critical thinking. This is quite different from dismissing an entire body of knowledge as irrelevant.

Interpreting information starts with understanding expertise. A taxi driver knows a lot about what is going on in his community. A CEO knows a lot about his own company. Neither one of them is an expert about economic prospects. That would not stop most in financial media from sticking a mike in front of them and asking about the chances for a "double dip."

Many bloggers are excellent in their specialized area, but then wander into giving their opinions about everything.

If you look around, you will see plenty of examples. It is not that experts are always correct in their predictions, but that is usually a good place to start.

Thanks for the good question.



I do like to listen to experts, and the point is well taken.

However, I find it hard to take economists seriously. Many of the models they build are so flawed its comical. Often they use the wrong math to try and define financial markets (Gaussian math doesn't cut it). They should try reading Mandelbrot. Secondly, they like models that create some ethereal equilibrium: so far from the real world. Samuelson's direction for modern economics has been an unmitigated disaster.

I would rather go with Keynes and make an effort to understand that we don't understand much about the future.

John the Cheap

At least in your case, if you say you talked with a taxi driver we can have confidence that you really did so (unlike some famous pundits we could name).


I appreciate your point of view, and I am grateful that you blog. I have changed my perspective as a direct result of some of your posts.
Still, I maintain one large bit of skepticism toward your work. My gut-reaction is to doubt the experts, but you often suggest we should only listen to the experts. But you also suggest listen to the likes of taxi-drivers. I wish you would expand on this topic, as I am not following you logig (my weakness).

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