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No one likes economists
Trends in the United States of America (USA) indicate that people hate bankers the most. In the list of the most hated, corporate managers, executive board managers and CEO's rank the second. This phenomenon is in particular valid for publicly held companies. In the list, economists in general rank the third. The issue now occupies articles. There is a certain truth: No one likes economists.
Nowadays in the USA companies' general boards are meeting. This week Bank of America's general board meeting was held. Ken Lewis, executive board manager of the company, lost his job. At Twitter, there was a photo of the protest held with the placard "When will the economy work for everyone's sake". Bank of America is a company; moreover a banking company. In that case, Ken Lewis is under the hated category. A while ago, we quoted from an American friend: During our one conversation at the end of last year, he said "Half of the current CEO's in the USA will lose their jobs in the first quarter of 2009 and the rest will be in jail." Do you remember? And that process has started. General boards of companies are holding meetings one after another. Next week we would like to share our impressions about company general board meetings in the USA. In our consideration, this recovery story will last longer.
Today, let us talk about this most hated list. We believe that this ranking will change several times. In the short run, those ranking the second place occupy the first place. In the medium run, economists jump up to the top in the list of most hated. When general board meetings end and when the rage of investors is cooled at most over a year, everyone as a whole starts to hate solely economists. Nowadays, they say "we all feed and educate them and they cannot even foresee a crisis" and get angry at us. Soon, they will say "There is no way they will find the exit" and get angry at us.
In short, challenging days are on the way. Why? Because the author of these commentary is also an economist. However, there is a saying: "There is no bad advertisement". It might be true that no one likes economists; however, please give us a shot and listen to us.
We guess you all know "those subtle words that contain much of a reality" about economists. Those reading "An economist is someone who can best explain why the estimations he made yesterday are proven wrong today." Sticking to the "Many a true word is spoken in jest" principle, let us examine the truth this joke involves.
Economic incidents have more than one determinants. Though many factors have impact on the outcome, each one contributes differently. It is necessary to make observations to identify the determinants of an incident and understand which of the determinants has higher impact on the outcome. Using the data you collected, you rank these numerous determinants based on their priority, and then you carry out an analysis paying regard to determinants you consider important among all contributing determinants. So, what do you do? You construct a model. Each model requires a priority ranking among elements contributing to the relevant outcome. You pick over the elements you believe are secondary. Otherwise, what you will construct will not be a model; it will be something chaotic that has no explanatory power. Then, to explain any economic incident, you develop an analysis framework based on the factors included in your model. Estimations of an economist are one way or another based on the model he constructs. Priorities the economist selects specify the analysis. Then, he makes an estimation. After that, let us say that the estimation proves wrong. Who can best know which factors were picked over when making the estimation as they were secondary? Of course the economist himself, who picked over those as they were secondary when constructing his own model and conceptual framework. So, the reality hidden in those subtle words is: If an economist knows what he is doing (so as there is a quack for each profession), he is the one who can best know why the estimation he made was proven wrong.
So, in this context, did economists failed to foresee this crisis? No, they did not. A number of economists from Roubini to Brad Setser, from Eichengreen to Kenneth Rogoff addressed several times the risks the US economy had. However, as Eichengreen also says nowadays, "those seeking to seize the opportunity of the day did not give credit to the analysis frameworks that minimized those risks." There were economists proposing such analysis frameworks. And surprise, surprise: they were right. What was the task? It was to construct a model that takes into consideration the factors that might impact the potential outcome. Constructing a model meant to make a selection among the contributory factors. So in a way set the priorities when you reduce the weight of risk factors. Economists monitoring the world with such a lens can successfully explain why their estimations were proven wrong. But, now it is too late.
So, what is the issue? The issue is not directly related to the economist saying "there is a risk here". The issue is the instinct to seize the opportunity despite the existing risks. This is the point where the issue intersects with the "behavioral economics", a lately developing field in economics. It is the point where psychology and economics conjoin together. It is the people that make economic decisions, any they do not always necessarily take rational ones. However, economic models are based on the assumption that people make rational decisions.
Years ago, laboratory tests proved "disaster myopia". Experts of the field, Nobel Prize winner economists Kahnemann and Tversky, wrote in their experiments that people tend to insure their cars after they have a car accident. Attention: Why do people tend to insure their cars when the memory of the accident is fresh in their minds though the risk is always the same? Is not this an irrational behavior? Yes, it is completely irrational. However, this is how humankind is. What we have been encountering is closely related with the codes written in the genes of the humankind. This is exactly what Eichengreen is trying to explain nowadays. When things are on track, there is no good in exaggeratingly explaining the risks contained in the economy in terms of the outcome. When things are on track, humankind tends to have a senseless faith that things will always be on track.
There is only what conclusion to be reached: that things are on track does not mean they will always stay on track. Though, this does not have a practical meaning. It can be hung onto the wall as a Murphy's Law, but who cares the warning on the wall while the opportunity is lying next to you? If things start to leave the track right after you express what is written on the wall, you become famous; just like Roubini. If things get back on the track, you become forgotten as you are a "cuckoo". Life is timing.
So, why cannot all economists have the right timing? Let us talk about this next week. Have a nice week.
This commentary was published in Referans daily on 02.05.2009