Better a fox than a hedgehog

Posted by:

Economist.com | NEW YORK

Categories:

The Perils of Prediction

CAN we blame the “experts” for not predicting the financial crisis? I don’t know of any scientific method that could have perfectly called and timed it. Some things were very troubling—global imbalances and the housing bubble—but did it have to get this bad? There were probably a myriad of ways it might have played out, some even worse, some better (remember the IMF hoping for a happy and gradual unwinding). How can you predict a tepid, inconsistent government reaction (economists suffered a touch of hubris there) and market panic? Human behaviour is tough to predict and when humans try to anticipate what other humans will do—you can get a big mess.

Philip Tetlock, a professor of organisational behaviour at the Haas Business School at the University of California-Berkeley, talks to Money about why humans make poor forecasters and, if you must listen to one, what qualities to look for. He reckons there exists two types of experts:

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.

According to Mr Tetlock you should listen to humble, self-critical experts who shy away from bold pronouncements. The better ones often use words such as “however" and "perhaps", instead of "moreover" and "all the more so". That’s a tough sell to CNBC. He claims these thoughtful types have higher success rates. But I would classify the people who called the crisis as hedgehogs rather than foxes. A foxy economist would probably not incur the moniker Dr Doom. Our now celebrated prophets see no end in sight and think things will get much worse; should we still listen to them?

No. In our research, the hedgehogs who get out front don`t tend to stay out front very long. They often overshoot. For example, among the few who correctly called the fall of the Soviet Union were what I call ethno-nationalist fundamentalists, who believed that multi-ethnic nations were likely to be torn apart. They were spectacularly right with Yugoslavia and the Soviet Union. But they also expected Nigeria, India and Canada to disintegrate. That`s how it is with hedgehogs: You get spectacular hits but lots of false alarms.