Bryan Caplan  

Kahneman on the Crash

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Daniel Kahneman's view of the 2008 crash is eerily similar to my own:
Many people now say they knew a financial crisis was coming, but they didn't really. After a crisis we tell ourselves we understand why it happened and maintain the illusion that the world is understandable.
Also:
Economists have a mystique among social scientists because they know mathematics. They are quite good at explaining what has happened after it has happened, but rarely before.
Still, I can't agree when he says:
In fact, we should accept the world is incomprehensible much of the time.
Given Kahneman's amazing track record of intellectual contributions, I don't think he really believes this either.



COMMENTS (6 to date)
Becon writes:

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Glen Smith writes:

Um, I knew the crash was coming about 15 years ago when I had a conversation about monetizing debt. The huge problem was that I missed big on the timing. I had said it basically said it would kill the economy in a few years and that was when I was told that I needed to pick a ideological master if I wanted to get work in economics.

Tom West writes:

In fact, we should accept the world is incomprehensible much of the time.

I would think it's pretty obvious. There are n-thousand degrees of freedom in any real-world problem involving humans (or just biology in general), and that tends to lead to lots of situations where we're right "sort of". i.e. we ignore most of the variables, and things kind of work out, except when they don't.

Problems like that are excellent for 20-20 hindsight, because we can take a handful of the n-thousand to construct a decent explanation for just about anything that might happen.

Steve Sailer writes:

Stage magicians, con men, and the guys who drew optical illusion cartoons for Ripley's Believe It or Not all knew Kahneman's amazing intellectual contributions a long time ago.

Floccina writes:

I love this quote:

Investment bankers believe in what they do. They don't want to hear that their decisions are no better than chance. The rest of us pay for their delusions.

I know a guy in finance and he is so earnest. He really thinks that he can tell people what to invest in to beat the market. He is so earnest I hate to tell him how convinced I am that he cannot.

I think that though most people are honest, we are all biased. A doctor may know that in operations accidents happen but he assumes that he nor his colleagues will not make a mistake and so he recommends a course of action that has less than 50% chance of improving things.

Mnels writes:

Since policy invariably arises from the conventional wisdom held by controlling political actors (and policy is re-filtered through a political/ideological prism), Kahneman may have conditioned his conclusion by stating that we should accept that the world is particularly incomprehensible to policy-makers.

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