Wednesday, May 13, 2009

The Crash

A wee interview with Philip Tetloc.

Some stuff:

Of course. Like all of us, experts go wrong when they try to fit simple models to complex situations. ("It's the Great Depression all over again!") They go wrong when they leap to judgment or are too slow to change their minds in the face of contrary evidence.

And like all of us, experts have a hard time with randomness. I once witnessed an experiment that pitted a classroom of Yale undergrads against a lone Norwegian rat in a T-maze. Food was put in the maze in no particular pattern, except that it was designed to end up in the left side of the "T" 60% of the time. Eventually, the rat learned always to turn left and so was rewarded 60% of the time. The students, on the other hand, fell for a variant of the "gambler's fallacy." Picture a roulette player who sees a long sequence of red and puts all his money on black because it's "due." Or more subtly, he looks for complex, alternating patterns - the same kind of mental wild-goose chase that technical stock pickers go on. That's what happened to the Yalies, who kept looking for some pattern that would predict where the food would be every time. They ended up being right just 52% of the time. Outsmarted by a rat.


Anonymous Lewis Carroll said...

I think his dichotomy on style of thought is interesting, but he's way off base in his application of it. Such as classifying Larry Summers as a 'fox'. Is he serious?:

As a matter of fact, I would hold Larry Summers out as the quintessential "brillant expert" who completely got everything wrong on financial regulation. (And I am not denying he is brilliant, mind you - compared to him, I can't think my way out of a wet paper bag)

The ability to think in nuanced ways and be aware of one's own limitations and biases is admittedly very valuable. If memory serves, according to a quote from Bertrand Russell, that kind of thinking is the essence of liberalism.

But Tetlock's generalized analysis leaves out an important factor about preidctions by *experts*: the quality of the rationale for the prediction. If he really wanted to glean valuable information from who was *right* about the crash, he should study those people who were not only right, but gave reasons why the status quo was untenable. People like Dean Baker, Peter Schiff, Paul Krugman and Nouriel Roubini.

Just my opinion.

10:17 PM  
Anonymous The Dark Avenger said...

I may not be as bright as Larry Summers, but I knew from 2005 that things were going downhill in the housing market from this 'leading indicator':

For investors from states like California where prices seem to move in only one direction -- up -- it was a stark example of a deflating bubble.

"When you lose money in real estate, you really feel it,'' said Igor Doncov, a software engineer in Half Moon Bay who bought two new houses in Las Vegas early in 2004 but sold them at a loss after his builder, Pulte Homes, cut prices on its new models by $180,000.

"I thought I couldn't lose," he said in a telephone interview. "But it turned into a total disaster."

Housing analysts don't think Las Vegas' slowdown is a sign that prices will soften soon in other fast-appreciating regions. But they say it is a warning of what could happen in the Bay Area as interest rates go up -- particularly for people trying to "flip" houses for a quick profit.
Aside from the people LC mentioned, there were others who were talking about the problem as well, but they were 'mere' blogs, here is one example that was pointed out to me almost 1.5 years ago, and it'll be 2 years old in a few months:

Very rarely do I come across a personal account that encompasses the entire scope of what a bursting bubble can do to an economy and the people living in it. Bubbles, as examined from the past, have a very similar pattern in the stages they progress. Mass euphoria leads to a case of mass resentment and depression both economically and personally for many families. I came across a letter written from a lawyer from Mason City, Iowa in the Corn Belt recounting the impact of the Great Depression on his town. It is a poignant and somewhat eerie story to read considering the date of writing is 1933. The similarities of what happens in the past raises many questions that I hope to discuss at length and how it will influence our future as a nation. These are things that as a society we will face. Foreclosures, larger numbers of families facing economic problems, and the repercussions of another bubble bursting.

11:58 AM  

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