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 . . .

>

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

Category: Economy, Financial Press, Markets, Psychology, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

41 Responses to “Experts, Crashes, Media, Skepticism”

  1. Mike in Nola says:

    This explains why I am considered tedious. Doesn’t explain why Barry isn’t.

  2. that’s the irony with peter schiff – he’s right out of the mold of the hedgehog. it’s just that parts of his big beautiful idea have worked recently.

    i guess we could say the same for mish as well – although he isn’t selling the same wares as schiff and has an even greater idea.

    maybe that’s not fair to mish on second thought – i just have never heard in any of his writing any semblance that perhaps his conclusions could be wrong or resolved in another fashion.

    but you barry are as wiley as a fox.

  3. Marcus Aurelius says:

    Apparently, with enough incentive, you can make a fox behave exactly like a hedgehog.

  4. Bruce in Tn says:

    Why should we be skeptical?

    http://en.wikipedia.org/wiki/Henry_Morgenthau,_Jr.

    ” Burton Folsom quotes Morgenthau, testifying before the House Ways and Means Committee in May 1939: “We are spending more money than we have ever spent before and it does not work. I want to see this country prosperous. I want to see people get a job. We have never made good on our promises. I say after eight years of this administration we have just as much unemployment as when we started and an enormous debt to boot.”

    We are, of course, smarter now…

  5. km4 says:

    A thought provoking post definitely worth exploring

    Chocolate Covered Cotton
    by billmon
    Wed Feb 18, 2009 at 10:09:39 PM PST
    http://www.dailykos.com/story/2009/2/19/05524/5446/499/699191

    Couple excerpts:

    To understand why Big Shitpile is just that – with hardly any ponies hidden at the bottom for eager prospectors to dig up – it worth taking a look at how the stinking heap was created in the first place. As it turns out, I’ve been spending much of my professional time lately studying what happened in the credit markets during the bubble years, so I think I have a slightly better grasp than I did at the time, when I only thought it would lead to a nasty financial crisis, as opposed to Great Depression II.

    The broad story is well known, even to the cable TV pinheads: Housing Bubble + Subprime Mortgage Lending + Derivatives = Armageddon. (The numerical illiterates at Fox News would probably add ACORN to that equation.) But even now I’m not sure if many people fully understand just how insanely reckless the carnival was, to the point where future historians will speak of “structured finance” in much the same the way we talk about the bubonic plague.

  6. dead hobo says:

    What makes some forecasters better than others?

    It depends on what they’re selling and what they get out of it if they make their case.

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

    How bad does said prognosticator need you for something? Are you an audience or a part of the way they earn a living?

    New questions…

    What if the forecaster is ok, or even just means well, but the interviewer is a lying manipulating jerk who will gain something if he discredits said prognosticator?

    What if both the interviewer and prognosticator are honest, but the interviewer is an idiot who makes the prognosticator look like an idiot by association?

    If a prognosticator makes a sound in the forest but nobody hears it, is it still a prediction? What if someone hears it but the message is garbled? What if it is heard clearly, but the listener is a drooling idiot?

  7. danm says:

    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.
    —–
    It’s much easier to be articulate when explaining a single big idea than when trying to explain the effects of multiple non-linear ideas.

    I’ve often been told that to convince the masses you’ve got to stick to MAX three ideas. With the multitude of signs popping up to warn us but the expert rehashing the same 2 or 3 positive ones, it’s no wonder most did not see this coming!

    Dori said it best: “Just keep swimming, just keep swimming, just keep swimming…”

  8. JustinTheSkeptic says:

    WTF, why isn’t anyone talking about the PPT, holding the flat-line? This economy sucks, and yet we hold a level that is at odds with future earnings. Would one of you gurus please explain… The financial media, in my opinion, is a covert opertive of the PPT. I wonder where they exchange code?

  9. O, the Timeliness of our beloved MSM..

    This notion, of the Fox/Hedgehog paradigm, has been with us for Years.
    http://www.icerocket.com/search?tab=web&fr=h&q=fox+hedgehog

    Do we get to Trade 18 Feb 2009, Today? As if..

  10. dead hobo says:

    Being a little more serious now, I have learned that most people have something valuable to say. They can be famous, infamous, ordinary, or hermits. All are also capable of saying things of monumental stupidity. The secret is being able to listen, and do it on more than one level.

    The listener has to privately ask himself “What is this person really saying?” A lot of messages will be coming out simultaneously. The challenge is to put all of them together into one story, then decide if you are learning something new or wasting some time. To listen well, you have to draw on outside information to see how what you hearing fits in? Also, you have to be smart enough to know there are unknowns and unknowables, and either work within those limitations or file what you heard away for future reference in another context elsewhere.

    Let’s not even start on “are you talking to an expert, or just someone who is anointed or popular”. Or maybe just a psychopath who wants something from you and you were unlucky enough to maintain eye contact for too long.

  11. Bruce N Tennessee says:

    Why should we be skeptical?

    http://www.wikio.com/politics/government/the_house/john_murtha

    Earmark Scandal Breaking

    “There’s a potentially big story brewing on Capitol Hill… Apparently 104 members of Congress of both parties — 42 Republicans and 62 Democrats — secured earmarks for a lobbying firm linked to Rep. John Murtha (D-PA) in a single bill. ”

    Bush, Obama, lobbyists, NO lobbyists…as I have soapboxed before…put your faith in yourself…be skeptical of populist promises…No one looks after you better than you…very ordinary men now in government….this is about as far from 1776 as one can be…

  12. Greg0658 says:

    Interesting thread and jumps from the original post. My 1st stall was the fox vs hedgehog analogy. To my knowledge both continue to live as a species. Not sure who has the upper hand in the Survival of the Species in the CIAs World Factbook. I intended to search out this reference to Isaiah_Berlin.
    When Bruce got me to Henry Morgenthau Jr. I got caught up in the “Jewish Refugees” subhead there .. as Rick Santelli was framing a coup at the CME. That frame (at wiki) reflects on the jewish indigent of Europe .. that helping them would inturn help the enemy by either assist via responsibilty removal or the those kindly resources diversion to troops. Hum “a curious exchange of energy .. watch closely now”. Seems history repeats. Where I have I heard that before?

    The link to Isaiha follows who wrote the book on foxes and hedgehogs so thanks to Mark for doing a composite link. I kinda think as an artist the hedgehog reference was nothing more than a dot a spark to expound upon (a concept caught on by others) to catch a hedgies ear.
    http://en.wikipedia.org/wiki/Isaiah_Berlin
    http://en.wikipedia.org/wiki/The_Hedgehog_and_the_Fox

    10-4 over and out

  13. Lars39 says:

    Most people tend to believe what want to be true so they may discount conflicting opinions or facts as noise. There have been so many points of view expessed over the recent past, that one can easily pick the ones that fit their perceptions or wishes. The average investor is told to diversify and ignore the news, so they ride the market down with the belief that it will recover eventually (hopefuly while they are still alive). Posters on this site are mostly savy investors, but those of us who rely on “advisors” for help are coming to realize that there are foxes, there are hedgehogs and there are skunks.

  14. Bruce N Tennessee says:

    The salt mine cranks up in 15 minutes, so this may be the last post of the morning…I do think I will concentrate over the next several weeks on how global protectionism is either growing or being contained…I think this is the next cutting edge value of the global recession, and if it appears that as conditions worsen, that the globe gives sway to blocking imports and other protectionist ideas, that things could get even worse…

    I haven’t seen a lot about this so far as far as actual effects, but again, I will try to keep up with it and report..

  15. Steve Barry says:

    The experts missed the crash, because since the early 80s, we were all on the same train of optimism…led there by Reagan at first, then Greenspan ran with it by fixing the system using monetary policy. If you weren’t a optimist, you were looked down on and more importantly, missed the big party or even worse, made very poor. I was in the lead car of the optimism train…then the Internet bubble crashed. I was shocked and made it my life’s work never to be fooled like that again. I became the ultimate realist…unfortunately right now that makes me an uber-bear. Most experts though were still drinking the even more powerful kool-aid in 2006-7 and thus of course could not see the track was out and the train derailed.

  16. danm says:

    I do think I will concentrate over the next several weeks on how global protectionism is either growing or being contained
    ————–
    I haven’t heard anything on how it is being contained?!

    And I heve not seen any government bailouts helping out other countries’ finances just because protectionism does not work.

  17. Moss says:

    Well we certainly know many many hedgehogs. I also think the analogy can be applied to entities/institutions not just individuals. It is also relevant to many things besides the economy and politics.

  18. leftback says:

    Good morning deflationary hedgehogs.. did you see that PPI number? Nervous??

    Now think about oil rising, even modestly, say to $50/bbl, on demand from overseas and dollar depreciation, now feed that into the producer price equation. Are you getting there yet?

    C’mon guys, the “R” train is leaving the station and the foxes are already on board.

  19. danm says:

    I was shocked and made it my life’s work never to be fooled like that again. I became the ultimate realist…unfortunately right now that makes me an uber-bear. Most experts though were still drinking the even more powerful kool-aid in 2006-7 and thus of course could not see the track was out and the train derailed
    ———-
    It always takes time to get over a pink slip or any form of rejection.

    Imagine Americans’ state of mind over the next couple of years… anger, depression before acceptance and productivity. It takes time to get closure. No other way around it.

    America is not ready for the bailout money! I don’t care how much money you throw at the problems, it’s going to take a couple of years.

  20. Greg0658 says:

    breaker … a surreal conversation I was having last week on wiki .. an individual states “you know that site is written/edited by any joe off the street” I said ya but the changes are documented, and later that day I add as a Britannica set was tapped “ya but who was in charge of that edit”

    why break in here .. it is a concern .. the real truth
    “dazed and confused for so long its not true”

  21. Todd says:

    If you don’t think protectionism is not coming, think again. Intel is spending 7billion on upgrading plants in the US. They haven’t done any major investments of this scale in the US in over 20 years. In the next few years they will be capable of building just about every chipset that they sell locally in each major economic block. Europe, Asia(China), and the US.

  22. Greg0658 says:

    since I don’t wanna see a 200 posts thread .. last one
    just now on the peacock cash station “the markets didn’t get much from these packages so we can support em”
    NOT how it was meant to work .. wait and see what is working .. you no longer get the front run .. sorry your industry F’d It Up

    and I’m kinda sorry that a Utopian society won’t be born from these times because all Presidents are strung like a puppets

  23. Bruce N Tennessee says:

    Morning Lefty,

    Yes, I saw the PPI…

    http://www.cnbc.com/id/29277460

    Jobless Claims Hit Record High; Inflation Jumps

    The money quote:

    “We’re maintaining a high level of labor market deterioration. In general I think we’re moving towards the pace of maximum contraction in the economy, but evidence for that is only preliminary,” said Alan Levenson, chief economist at T. Rowe Price in Baltimore.”

    Translated, he said,” Here at T. Rowe Price, I serve waffles in the morning. Here is my morning waffle. Next time I am interviewed, I will try to find some beef to serve with it…”

    Back to work…

  24. Transor Z says:

    How to spot a fox:

    1. They probably aren’t on TV, and if they are

    2. The glib a-hole talking head interviewer is impatient and dismissive because the fox is taking too long/not following the standard TV interview formulas/not charismatic/too thoughtful and nuanced for the glib a-hole to understand. IMO most TV personalities are “hedgehogs” that attack foxes. “The medium is the message.”

    There’s actually a term for this phenomenon: Sociology of Knowledge. See http://en.wikipedia.org/wiki/Sociology_of_knowledge

    It’s a study of how society prioritizes which “experts” to listen to and arrives at consensus reality.

  25. ottovbvs says:

    Most “experts” missed the signs because they had a vested interest in missing them. Now of course all the “experts” including the ones here are swinging too far in the other direction. Yes we’ve got a rough year, profits will be in the tank, a big bank or two could get nationalized, unemployment will go to around 9%, negative growth probably for this and the next two or three quarters, but reports of the death of the US economy are being somewhat overstated. Basically we’re faced with a couple of year when the US economy is going to be operating below optimum (not overheated) capacity. I accepted that long ago and adjusted accordingly. All this running around forecasting jumps in protectionism, massive deflation, massive inflation (I’ve heard both predictions here) etc etc is somewhat overwrought. This is the attitude of people like Doug Kass and Uncle Warren and it’s mine.

  26. Mannwich says:

    Steve Barry said: “If you weren’t a optimist, you were looked down on and more importantly, missed the big party or even worse, made very poor.”

    Make no mistake, that mentality is still with us in a big way, hence the blank stares (and denial-glazed comments) in social settings when the topic of this meltdown comes up.

  27. leftback says:

    Mannwich: You are right on about the blank stares and denial.
    That’s why I don’t bring it up in social settings, if I ever find myself in any, which I don’t.

    The denial runs deep and it’s not just a question of people’s portfolios or 401K plans.
    Everyone who was wrong is still running things. Local government is run by FIRE people.
    Universities are run by people who borrowed a lot of money to erect massive buildings.
    We have an enormous societal problem now. The Tyranny of the Incompetent continues.

    At some point there has to be an abrupt change in direction and leadership.

  28. ottovbvs says:

    Mannwich Says:

    February 19th, 2009 at 10:25 am

    leftback Says:

    February 19th, 2009 at 10:43 am

    ……..I think you guys must mix in different social circles than me….or no social circles in the case of Leftback……because the economic meltdown, the state of investment portfolios, the state budget deficits et al are “the” topic du jour at just about every group I go into, and with friends and business acquaintances with whom I interact individually……Of course you could be living in a Trappist Monastery….or the cyber version of it.

  29. Bruce N Tennessee says:

    Lefty:

    Do all Englishmen really say “Jolly good?”

    http://www.cnbc.com/id/15840232?video=1039822859&play=1

    Global Depression, Not Recession

    I noticed that this “gent” does….and I love to hear English spoken the way he does it…

    ..just another skeptic, but no one shouted this man down on camera…

  30. Mannwich says:

    @otto: Perhaps that’s true in some respects. I think if you run in circles with people who work in the financial services industry (which I don’t anymore), then it’s probably the first (and maybe only) topic of discussion in many respects, but I tell you here in the Twin Cities, that’s not what I’m finding (aside from a few of our neighbors, one who works at Travelers, the other at Wells and another is an importer/exporter). For the most part, I think people are shocked or still in a bit of denial about it, although that’s likely changing slowly.

  31. donna says:

    We simply don’t teach critical thinking skills any more. I taught my kids to grow up asking questions. Drove their teachers nuts, but made them better learners. You can’t just accept whatever people are telling you and work it into your theories. YOu have to be able to question your own theories too.

    Hold your truths lightly, as they say.

    ~~~

    BR: Strong Opinions, Weakly Held . . .

  32. We are, of course, smarter now…

    smarter or smarting?

  33. ottovbvs says:

    Bruce N Tennessee Says:

    February 19th, 2009 at 11:09 am
    Lefty:

    Do all Englishmen really say “Jolly good?”

    …..They do indeed…..it’s a phrase I’ve kept from growing up there along with a Brit leaning accent. It was always useful for picking up women I found. It sounds a bit crazy but there are business environments where it’s an advantage. It must have been all that time they spent ruling the empire. They were pretty good at it “actually” which is another English favorite. Probably because they were fairly tolerant and didn’t take themselves too seriously.

  34. H Salmon says:

    I learned critical thinking in an early career (one Barry shares). Then moved to Corporate America and found it completely discouraged. Those who engaged in it were feared/forced out as “hedgehogs” (we had another word) tried to spin whatever the leader wanted as great strategy. No surprise to me that so many companies are struggling – managing for short-term #s, executive bonuses, office politicians, and a revolving door as those executives leveraged short term success to jump ship for better opportunities just spells eventual disaster.

    It’s now hard for me to invest in equities as I am always suspicious. Makes we want to only invest in companies that I control.

    I am hoping that we are entering a new age of more critical analysis, but we certainly are not in Washington. Bloomberg had a great interview with Michael Porter where he nailed it – Washington just completely lacks any strategic thinking. Anyway, it is wonderful to have sites like TBP where you can hear from true thinkers and entertain different views.

  35. Mannwich says:

    @H Salmon: I think that’s what’s making me (and others) so edgy about the state of affairs in this country these days. As leftback put it: too many of the incompetents and fishbowl back-slappers are still running the show (outside of O, who hasn’t proven his competence either way yet). Until that changes, I fear we’re just going to make the same, or bigger, mistakes that only makes the problem worse.

  36. tryflyfishing says:

    My father -a journalist- told me to start with “Why is this bastard lying to me?” It would help if journalists started this way today.

  37. comet52 says:

    Hedgehog identifier keywords:
    Elliot wave
    hyperinflation
    deflationary spiral
    “the yellow metal”

    Fox identifier keywords:
    beats me, who knows where this financial trainwreck is going next

  38. Bruce N Tennessee says:

    @Otto:

    I have always admired the English of the 20th century..the entire “Us against the 3rd reich” thing, I guess.
    And most of our democratic ideas, of course… like anyone else they’ve had their share of screw- ups too, but they’ve been very good friends…I hope the downturn is not as bad on them as it appears in the early going…

  39. karen says:

    tryflyfishing, i like tha take. thanks.

  40. DC says:

    From Tetlock:

    – Unless you force experts to be specific, as we did, they can make predictions that are difficult to falsify. You know the cynical cliche “Never assign a date and a number to the same prediction.” That lets you get away with saying things like “Yes, I did say the Dow will hit 36,000, and it will – just wait. I was merely a little early.” –

    This exact dodge was used moments ago by Louise Yamada on CNBC. She’s been leading the league in the last few months and she predicts S&P 600 but won’t say when.

    That’s one of the great things about Nightly Business Report: Paul Kangas puts up charts of prior predictions to hold guests’ feet to the fire.

    CNBC is too gutless, too lazy, or both to attempt something that might jeopardize their Japanese-game-show, Santelli for Senate, We Are Turning the Corner environment. The notable exception to this is Fast Money which on occasion takes ownership of bad calls.

  41. duncanst says:

    You need to keep in mind the the definition of an expert (any expert):

    An expert is one who knows more and more about less and less until eventually they know everything about nothing.