We are Not as Smart as We'd Like to Think

Writing at VoxEu.org Victor Ginsburgh, of the Université Libre de Bruxelles, notes that experts aren't so expert in many situations:

A paper by Fritz et al (2012) published last week in the Proceedings of the National Academy of Sciences shows that professional musicians are unable to distinguish between the tonal superiority of a violin built by Stradivari (which would cost up to $4 million) from that of a new American instrument (a couple of thousand). . .

Likewise, Ashenfelter and Quandt (1999) [here in DOC] show that there is lack of concordance between wine judges. Hodgson’s (2008) [here in PDF] result is even stronger, since he finds that only about 10% of the judges are able to replicate their score within a single wine medal group.

In artistic skating, evaluation depends on the incentives and the monitoring faced by judges. Lee (2004) points out that they face an “outlier aversion bias” because they may be excluded from further competitions if they cannot explain why their rating is at odds with the mean of other judges. Therefore, they manipulate their ratings to achieve “a targeted level of agreement with the other judges,” which essentially implies that their judgement is based on previous achievements, and not on the one that is unfolding, since they have to cast their votes a couple of seconds after the performance of each skater.

In related news the Federal Reserve has released transcripts of their deliberations in 2006 on the eve of the financial crisis. NPR provides a nice round-up of coverage:

Here's how the Los Angeles Times frames the story: The transcripts, released Thursday after the usual five-year wait, "reveal in painfully embarrassing detail the high degree of overconfidence and lack of foresight just ahead of the real estate collapse and financial crisis that engulfed the nation" . . .

Perhaps, The Wall Street Journal's Real Time Economics blog found the best bit. During the March 27-28 meeting the Fed's chief economist, David Stockton described a dire situation, which Bernanke acknowledged but quickly dismissed:

"'Right now, it feels a bit like riding a roller coaster with one's eyes shut,' when discussing his forecast for a modest slowdown in housing. 'We sense that we're going over the top, but we just don't know what lies below.' Later, he notes that housing is 'the most salient risk' to the economy. 'I just don't know how to forecast those prices,' he says of housing prices.

"'Again, I think we are unlikely to see growth being derailed by the housing market, but I do want us to be prepared for some quarter-to-quarter fluctuations,' Bernanke says. He identifies housing as a crucial issue, but adds that he agrees 'with most of the commentary that the strong fundamentals support a relatively soft landing in housing."

We are not as smart as we'd like to think we are. Trust me on this, I'm an expert.

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