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Believing the “experts”

One of my favourite topics – indeed, in a way, the basis of my current research – is looking at how we tend to accept the declarations of other people as true without bothering to think on the issue for ourselves.  This is often a perfectly rational thing to do, as thinking carefully about things is both difficult and time consuming, often resulting in several possible answers that serve to increase our confusion, not lessen it.  If we can find somebody we trust to do the thinking for us and then tell us their conclusions, that can leave us free to put our time to work in other areas.

The trick is in that “trust” component.  To my mind, we not only tend to accept the views of people widely accepted to be experts, but also of anybody that we believe knows more than us on the topic.  This is one of the key reasons why I am not convinced by the “wisdom of crowds” theory and it’s big brother in financial markets, the efficient market hypothesis. I’m happy to accept that they might work when individual opinions are independent of each other, but they rarely are.

Via Greg Mankiw, I’ve just discovered a fantastic example of a person who is not an expert on a topic, but definitely more knowledgeable than most people, who nevertheless got something entirely wrong.  The person is Mark Hulbert, who is no slouch in the commentary department. Here is his article over at MarketWatch:

I had argued in previous columns that inflation might not be heating up, despite evidence to the contrary from lots of different sources …

I had based my argument on the narrowing yield spread between regular Treasury bonds and the special type of Treasuries known as TIPS. The only apparent difference between these two kinds of Treasury securities is that TIPS’ interest rates are protected against changes in the inflation rate. So I had assumed that we can deduce the bond market’s expectations of future inflation by comparing their yields.

… My argument appeared to make perfect sense, and I certainly was not the only one that was making it. But I now believe that I was wrong. Interpreted correctly, the message of the bond market actually is that inflation is indeed going up.

… My education came courtesy of Stephen Cecchetti, a former director of research at the New York Fed and currently professor of global finance at Brandeis University. In an interview, Cecchetti pointed out that other factors must be introduced into the equation when deducing the market’s inflationary expectations from the spread between the yields on TIPS and regular Treasuries.

The most important of these other factors right now is the relative size of the markets for TIPS and regular Treasury securities. Whereas the market for the latter is huge — larger, in fact, than the equity market — the TIPS market is several orders of magnitude smaller. This means that, relative to regular Treasuries, TIPS yields must be higher to compensate investors for this relative illiquidity.

And that, in turn, means that the spread between the yields on regular Treasuries and TIPS will understate the bond market’s expectations of future inflation.

Complicating factors even more is that this so-called illiquidity premium is not constant. So economists have had to devise elaborate econometric models to adjust for it and other factors. And those models are showing inflationary expectations to have dramatically worsened in recent months.

I have never met Mr. Hulbert, nor read any of his other articles.  I cannot claim that I wouldn’t have made the same mistake and I have to tip my hat to him for being willing to face up to it.  There are remarkably few people who would do that.

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Optimal power structures

I recently wrote that:

Hierarchies [of power] allow for genuine decision making over the endless, cacophonic debates of pure democracy, but they come at the cost of hampering information flow (at an extreme, it becomes unidirectional) and making people at the bottom feel ineffective or inconsequential.  As a society, we seem to have settled on the idea of power being locally hierarchical, but globally competitive between those separate hierarchies.

I hypothesise that hierarchies are the constrained-optimal power structure for most, if not all, collaborative human endeavours. I imagine the optimal height and breadth of the hierarchy to be a function of the two, possibly intertwined, technologies at play: that used to aggregate individual beliefs to arrive at decisions, and that used to combine individual efforts to produce the output.

I likewise hypothesise that social networks are the optimal power structure for most, if not all, competitive human endeavours, with beliefs propagating across the network and decisions being made by individual nodes. I imagine the optimal network parameters (number of links per node, weighting per link, etc) to be functions of how similar the output of individual nodes are and the costs of maintaining each link.

Note that if the aggregate output for collaborative endeavours is a linear function of the output of each individual, then a hierarchy can be seen as a special case of a network with asymmetric link weightings: A takes more account of B’s view than B does of A’s.  This raises the intriguing possibility of the two types of model being able to be nested.  Do linear aggregation functions represent a definition of competitive endeavours?

I argue that these hypotheses are true on the simple basis that they are what we observe.  Collaborative efforts are always hierarchical.  Competitive efforts interact through networks.  I’d invite any examples of counter-factuals.  If there are any counterfactuals – if, for example, a power structure exists that is highly hierarchical (tall and narrow) when the optimal structure is much more network oriented – then the key question is ‘Why doesn’t it change?’.  Why doesn’t the Coase theorem kick into gear?

There’s an obvious question of where and how democracy fits into my framing of the world.  I imagine democracy as being something based on a social network.  For any given shock (i.e. news), once the network of opinions stabilises, democracy is just the formal counting of which nodes believe what.  Within this, though, I make a distinction between two different types of pure democracy. When the network is uniformly connected and every link carries the same weight, then every person truly carries the same value to the overall decision.  By contrast, when the network is not uniformly connected and/or weights are different across links, then even if individuals get an equal vote each in the decision, their opinions will be biased towards those individuals with more links and more weights.  Nevertheless, both situations count as “pure” democracy.  Obviously any type of representative democracy represents a hierarchy.  Even in the upper level where the democracy is played out there are sub-levels of deferred power.  Witness the machinations and power-plays of the UK’s House of Commons.

Web 2.0 sites such as Wikipedia, Digg, Slashdot and del.icio.us represent an interesting experiment here because while they are clearly collaborative to some extent, they each claim, to varying degrees, to be purely democratic.  The users both contribute content and decide which contributions are most important.  There is an ongoing debate over who contributes most to such sites.  One view, from people such as Aaron Swartz, argues that:

[Outsiders] make one edit to add a chunk of information, then insiders make several edits tweaking and reformatting it. In addition, insiders rack up thousands of edits doing things like changing the name of a category across the entire site — the kind of thing only insiders deeply care about. As a result, insiders account for the vast majority of the edits. But it’s the outsiders who provide nearly all of the content.

By contrast, Chris Wilson (of Slate) notes essentially the opposite view:

Palo Alto Research Center’s Ed Chi, the scientist who determined that 1 percent of Wikipedians author half of the content, told me he originally hypothesized that the site’s most energetic editors were acting as custodians. Chi guessed that these users mostly cleaned up after the people who provided the bulk of the encyclopedia’s facts. In reality, he found the opposite was true (PDF). People who’ve made more than 10,000 edits add nearly twice as many words to Wikipedia as they delete. By contrast, those who’ve made fewer than 100 edits are the only group that deletes more words than it adds. A small number of people are writing the articles, it seems, while less-frequent users are given the tasks of error correction and typo fixing.

But the debate over who contributes to Wikipedia and Digg is not of particular concern to me per se.  My concern is the power structures of these sites and that is quite recognisable.  Wikipedia has guiding editors who can lock pages down.  Digg and Slashdot both employ moderators that get veto power over the user-voting.  There is a formalised, structural hierarchy.  What is interesting is that there also seems to be an informal hierarchy based on the volume of user contributions.  The users that contribute more also get more of a voice when decisions are made.  Quoting Chris Wilson’s Slate article again:

The influence of these members was particularly apparent last month. After Digg tweaked its secret sauce, top contributors noticed a decline in influence—fewer of their submissions became top stories. The super Diggers published an open letter of grievances and threatened to boycott the site. The changes in the algorithm, the Digg execs said, were meant to bring a more diverse set of stories to the site, and they begged for patience from the top Digg contributors. (Thus far, a shaky truce has endured.) The takeaway: Digg’s brass believe that the site, which purports to be the product of a broad-based community, will cease to run smoothly if a microscopic percentage of its user base stops participating.

The reasons for this are simple enough:  Without the top contributors, the overall value of these sites would plummet.  They therefore have far more bargaining power with the formal power structures of the site owners.

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The endless, cacophonic debates of pure democracy

Believing in something and being willing to act on it are two different things. It is terribly difficult to confront authority. Confrontation itself is hard. It’s awkward; uncomfortable. Your face may flush, you might sweat, or stammer. Worse, you can find your mind slipping. Your memory may fail you, the speed or rigour of your thought may lessen and the strength of your argument weaken as a result.

When the confrontation is with authority the difficulty is even worse. Many people have an instinctive acquiescence towards figures of power or authority. It can feel wrong in the gut to openly disagree with them. If you fear that the confrontation may result in bridges being burned, or if you feel that you owe the figure of authority in some way, it can be impossible.

Understand that I am not referring to the discussion of something that you feel ought to change with people you consider your peers. That is easy and even serves as a sort of release-valve for tension on the topic by letting you know that you’re not alone in your beliefs. A simple suggestion to a figure of seniority can often be comfortably managed by most. I am speaking of a push for change; seeking actively to change the actions, if not the very mindset, of an authority figure who may be reticent to the idea.

This is one of the reasons, if not the ultimate justification, for anonymous ballots. The safety of anonymity can free people of their inhibitions and allow them to speak as they truly feel. But what of organisations that do not have a democratic structure? What of the hierarchical power structures of firms and government agencies, of schools and universities and charities?

Hierarchies allow for genuine decision making over the endless, cacophonic debates of pure democracy, but they come at the cost of hampering information flow (at an extreme, it becomes unidirectional) and making people at the bottom feel ineffective or inconsequential.

As a society, we seem to have settled on the idea of power being locally hierarchical, but globally competitive between those separate hierarchies. This concept works best when those hierarchies compete not just in the ideas that they represent, but also for the individuals that they are made up from. The competition for individuals should mean that there is a countervailing force to the negative aspects of hierarchies: in order to attract and keep the best people, the hierarchy must work to involve those people in its thinking.

I am fine with this concept – I do not support radical decentralisation – but we need to recognise that people are not free to costlessly move between hierarchies. This means that the incentive to involve them in the hierarchies’ thinking processes is lessened. It seems reasonable to assume that as the cost of moving to another hierarchy as a fraction of individual benefit gained goes down, the more involved a person will be invited to be. In equilibrium, we would therefore expect the degree of involvement to decrease monotonically as you move down any given hierarchy.

While I do not wish for a pure democracy in everything, I think that the optimum would involve deliberate mechanisms for allowing ideas and information to pass upwards through a hierarchy. Perhaps an open market for ideas on each level, with those “voted best” being passed up to the level above?

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Moist robots (of a sort)

Scott Adams has a thing where he considers humans (well, all animals, I guess) to be “moist robots,” in that we have no free will.  I tend not to think about it too much, but here are some recent bits of research that strike me as interesting:

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Low-information advertising

Go here to read a wonderful question from Richard Posner.  It’s much too long to post here, but here is his topic:

At the same time that sellers forgo much product disclosure that would seem advantageous both to them and to their customers, they make disclosures that have no information value and should not persuade any rational consumer, such as implausible, self-serving, and empty claims that their product is better, or super; and these claims are often wrapped in clever, funny pictures or anecdotes that are designed to seize the attention of the viewer, but that convey no information.

Posner’s question is a simple one:  why?  In their typical conversational posting style, Gary Becker posted his opinion.  It’s again too long to post in it’s entirety, but two paragraphs of note are:

Economists have generally not been friendly toward persuasive advertising since it is much easier with the usual economic analysis to discuss advertisements that provide information or misinformation. Yet tools are also available for considering the persuasive formation of attitudes and preferences with rational consumer behavior – see my book of essays, Accounting for Tastes, 1996. Although such an analysis of preference formation is dependent on some underlying psychological mechanisms that are not well understood, the process appears to be quite rational.

…

That said, challenging puzzles remain in using economic analysis to explain the types of information used and not used in advertisements, whether or not there are comparisons to the products of rivals. However, given all the professional time and thought that goes into advertisements, I am reluctant to claim that advertisers are not rational in what they do, for we do not understand all the relevant considerations that enter into the determination of the types of persuasion and information that are highlighted.

I have been fascinated by this for a while.  I think a good example lies in product packaging.  A year or two ago I was shopping for a new web-camera.  At the time, a major producer of webcams offered a “Webcam Live!” and a “Webcam Live! Pro”, with the latter 20% more expensive, in a noticeably larger box (despite housing a product of the same volume) and with insufficient information printed on either box to allow a potential customer to identify the functional difference between the two.

More than simple vertical product differentiation, this seems to me to also be a form of “information discrimination”.  By denying the consumer the details of the differences between the two options and offering only general, suggestive signals of their respective quality, the producer seems to ensure that wealthier consumers will purchase the more expensive option and that poorer individuals will choose the cheaper option, irrespective of their functional or qualitative differences.  Armed with complete information, the wealthy consumer might recognise that they only require the functionality of the cheaper option, or the poorer consumer – who cannot afford the more expensive option – might consider the cheaper option insufficient for their needs and so not buy either.

Of course, such a tactic on the part of the manufacturer would necessarily rely on two social norms: (a) that people generally accept the information presented to them and make their decision on that basis without seeking more; and (b) that people generally believe that information presented to them, if not entirely accurate, is at least indicative of the truth.

We can expand this by considering the retail outlet that sells the webcams. The retailer would be capable of circumventing the producer’s packaging strategy by, for example, putting information cards beside the two boxes or employing highly knowledgeable retail staff. However, assuming that the retailer shares in the profit from the product sales and not just the revenue, it is in their best interest to collude with the producer and provide no additional information.  Without naming names, I can assure readers that this is exactly the scenario that I encountered (the no extra information, that is, not the collusion).

Of course, the two companies would carry a risk of reputation damage as a result of their discrimination.  If, as seems intuitively reasonable to me, there is also a third social norm of tending to allot blame to the most visible perpetrator, the retailer carries the bulk of this risk.  How can they offset this?  By having an advertising campaign emphasise how helpful and informative their staff are …

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Moving the mainstream (some notes)

I’ve been wanting to write an essay on this for ages, but every time I think or talk to someone about it, I get hit with more ideas and different approaches. In the interests of not forgetting them, I thought it might be worthwhile formalising, if not my opinions, then at least the topics that I want to write on. I’m very interested in people’s opinions on these, so if you have a particular view, please leave some comments.

  1. Economics as an expression of ideology
  2. Language choice as:
    1. (+ve) a means of aiding communication in a specialised field
    2. (+ve) a means of enforcing definitional and therefore intellectual rigour [e.g. arguments over the meaning of “market failure”]
    3. (~) a shaper of methodology
    4. (~) a signal of author competence or paper quality [e.g. “the market for lemmas” or the comment made by a French philosopher, mentioned by Daniel Dennett in a footnote of his book “Breaking the spell”]
    5. (-ve) an embodiment of ideology or bias [e.g. 95% of the work in feminism interpretting literature seems to be in highlighting this sort of stuff]
    6. (-ve) a barrier to outside comment or involvement
  3. The fact that mathematics in general and modelling in particular are each a choice of language
  4. “All models are wrong; some are useful” — George Box
  5. The different purposes of models:
    1. to explore the implications of particular assumptions [moving forwards]
    2. to illustrate the possibility (or plausibility) of a particular outcome [moving backwards]
    3. to explain an observed outcome, or a collection of observed outcomes [moving backwards]
  6. Closed-form (i.e. analytically solvable) modelling versus simulation modelling
  7. Empirical work: justifying assumptions versus confirming outcomes (or challenging either)
  8. Simplifying assumptions versus substantive assumptions
  9. The reasonableness of assumptions:
    1. Representative assumptions [e.g. Friedman’s billiards player]
    2. Direct behaviour versus emergent behaviour
    3. The importance of context [e.g. what is valid at the individual level may not be at the aggregate level]
  10. Fashions and fads in academia. The conflict between:
    1. The need to tackle “the big issues”
    2. The desire to stand out (do something different)
    3. The impulse to follow-the-leader/jump-on-the-bandwagon
    4. The (incentive driven ?) need to publish rapidly, frequently and consistently [i.e. the mantra of “publish or perish“]
    5. The desire to influence real-world policy or public opinion
  11. Heuristics in academia. Rules-of-thumb or a preference for particular techniques. Is it “better” to learn a few types of model extremely well than several models reasonably well? It does allow researchers to jump onto a new topic and produce a few papers very quickly … [e.g. this]
  12. Mainstream conclusions (or opinions) versus mainstream methodology
  13. How to move the mainstream:
    1. Stay in and push or jump out and call to those still in? [e.g. See, in particular, all the discussion on the topic of heterodoxy vs. orthodoxy and Keynesianism vs. Neoclassicalism around the blogosphere before, during and after this comment by Brad DeLong]
    2. The importance of data
    3. The importance of tone and language
    4. The importance of location (both institution and country) [e.g. Justin Wolfers: “I could do the same work I’m doing now for an Australian institution, and the truth is, no one would listen“]
    5. The importance of academic standing
    6. The risk versus the reward
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Managing the news cycle

Peter Martin draws attention to the Australian Treasury press release listing the adjusted figures for the government surplus in 2006-07:

Preliminary estimates indicate that the Australian Government general government sector recorded an underlying cash surplus of $17.3 billion for 2006-07, which is $3.7 billion higher than expected at the time of the 2007-08 Budget.

A commenter on Peter’s site asks the obvious question:

Is it a good thing that treasury gets it’s numbers so consistently wrong? Who is responsible for the mistake – in this case an error of 27%. If it had gone 27% the other way who would have copped it?

27% is indeed a very large adjustment, and it’s rather difficult to imagine this sort of revision being made in the other direction. It is possible that the adjustment is just as much a surprise to Mr Costello as it (nominally) is to the media, but I suspect that it was always known – or at least believed – in the Treasury that the figures included in the 2007-08 Budget were too low. They will have, at best, decided to err on the side of caution (in case their internal numbers were wrong or there was a sudden crisis that worked against it) and, at worst, knowingly understated the true figures in order to guarantee the political capital boost they’d get later in the election cycle (i.e. now) when the upwardly revised figures were released.

I’ll leave it up to the audience to come to their own conclusions on which is the more likely explanation.

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Conspiracy theories and the current market turmoil

A friend pointed me to this conspiracy theory video. I’ve not watched more than 30 seconds of this particular video, but according to discussion on the RANDI forums, I understand that it splices footage directly from a number of other conspiracy theory films into one, with all the greatest hits of the anti-establishment anarchist left being given a run (christians and/or jews are evil and secretly rule the world, 9/11 was a government inside job, the entire global banking system is a sham and run by bad people, etc).

Of more interest to me is this question, put to me by my friend:

Why are more and more of these conspiracy theories coming out in video format only, with no transcriptions?

Perhaps it’s to appeal to a wider audience (i.e. more people are willing to watch a movie than read the equivalent text). Perhaps it’s because a movie can more readily achieve an intense, even emotional, impact than abstract text. Perhaps it’s just another example of market demand and supply …

The real (as in true) explanations for what goes on tend to be considerably more complex and almost infinitely more tedious than those offered by conspiracy theorists. People seem to want answers, but aren’t willing to accept that they might be anything other than simple and exciting. Maybe that’s a result of today’s media culture of soundbite-driven news and action movies, but maybe it’s just an unfortunate consequence of otherwise rational ignorance. You can’t be an expert in everything (strictly speaking, it’s too costly), so you don’t waste your time trying and instead trust the summaries given by people you take to be experts.

As an example of the demand for simplified summaries, consider the recent turmoil on the world’s credit- and stock-markets. I have spoken to several people about the happenings and most of them aren’t the least bit interested in understanding the details of what’s going on. Instead, they only want to know if (a) the world is going to end (i.e. they’re going to lose their job or their pension savings are going to collapse) or (b) if it’s all been caused by evil, money-grubbing people deliberately destabilising the world for their private profit.

By my thinking, to really understand the current turmoil (I still refuse to call it a crisis), you need to understand the basics of:

  • How bonds work
  • The difference between long-term and short-term bonds
  • The difference between government and commercial securities
  • The fact that central banks announce a target interest rate rather than fixing it by fiat
  • Reserve requirements
  • Overnight inter-bank lending
  • How banks view loans to consumers (i.e. as assets)
  • Structured finance in general
  • CDOs in particular
  • Derivatives
  • Hedging and hedge funds
  • The difference between credit markets, stock markets and foreign exchange markets and how movements in each might affect the others
  • The carry trade

And that’s before you start considering the psychology of the people involved and all the resulting work in behavioural finance. Unless you’re seriously (and usually, professionally) interested in investment, finance or economics, why would you care about all of those details? You wouldn’t … you just want to know if the world is going to end and if there’s somebody to blame.

On the supply side of these nuggets of information, you have … well, you’re looking at one. Commentators, both professional (in the mainstream media) and self-appointed (in your local pub and all over the internet) are competing to convince you that they are experts in the topic at hand and having managed that, to provide you with their summarised opinions.

Suppose, however, that for some reason you can’t properly identify who is a real expert or you have some reason to distrust the experts you can identify. In that case, you’re left taking in the simplified views of non-expert subject-matter aficionados, of which a small but statistically-significant fraction are going to be conspiracy theorists. Insofar as they want to expand their customer base, conspiracy theorists (who, to be frank, are often less troubled by the truth than they are with attracting an audience) will experiment with their provision of service to best meet the demand for simple and exciting explanations. Thus, we have movies with no (tedious) transcripts.

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Heuristics in academic economics

Andrew Leigh gives a heads-up on an upcoming conference at the ANU on ‘Tricks of the Argumentative Trade’. Shamelessly repeating Andrew’s quote:

‘Philosophical Heuristics’
Alan Hajek (Philosophy, RSSS, CASS, ANU)
Chess players typically benefit from mastering various heuristics: ‘castle early’, ‘avoid isolated pawns’, and so on. Indeed, most complex tasks have their own sets of heuristics. Doing philosophy well can be a very complex task; are there associated heuristics? I find the grandmasters of philosophy repeatedly using certain techniques, many of which can be easily learned and applied.
…
‘Argumentative Tricks in Politics and Journalism’
Morag Fraser (The Age)
Politicians and journalists use many argumentative and rhetorical techniques, some of their own devising, others thrust upon them. This talk will survey a field of examples from the media and politics – from the ways and means of factual communication to ‘spin’ – and take an occasional detour through historical precedents and prescriptions.

This is fascinating stuff and it syncs very well with some advice I got from a friend who is a recent economics post-doc: that theoretical economists seem to focus on truly mastering a few key models and then applying them to each topic that they come across. One of the key benefits is that by really knowing these models well, the theoreticians will already know how to prove all of the major propositions, which allows them to generate new papers very rapidly. My friend opined that the biggest names seemed to focus on just 4 or 5 different models, while the smaller names either didn’t focus on any particular model, or focused on just one or two.

It also matches my (extremely) limited exploration of economic literature. I’m currently avoiding study for my Development and Growth exam and sometimes it seems like one of the professors whose papers we regularly study only ever looks at a topic through a principal-agent model. We’ve had moral hazard put forward as explaining credit rationing, the success of microfinance, agricultural organisation, the maintenance of social networks, the optimal organisation for the provision of public goods in general, problems in health care, problems in education, and, and …

If, by some chance, any academic economists out there happen to read this: Do you see this in your readings? Do individual researchers (or more generally, specific universities) seem to always spit out the same model in different topics?