Why Experts Are Often Wrong

I can't think of two economists who are doing more interesting work than David Levy and Sandra Peart. Their recent book The Vanity of the Philosopher is incredible and they've got a new paper making the rounds about expertise. Here's a snippet from David Warsh's consistently fascinating webzine, Economic Principals:

Levy and Peart's recent work is directed towards the problem of rendering the expert witness more accountable. Indeed, the subtitle of "Inducing Greater Transparency" is "Towards the Establishment of Ethical Rules for Econometrics." (The relatively recently-arrived profession has no code of ethics, formal or, according to many practitioners, informal.) But the problems they are examining are common to a wide range of professional experts, judges, regulators, educators, referees and watchdogs on which society depends to do its business. "Bias" and "capture" of the sort of which, most recently, the credit-rating agencies stand accused are ubiquitous. How, then, to solve what they call "the enormous problem" of harnessing small groups to serve the interests of the general public?

The minimum goal should be transparency, they say.  Other people, including the experts' competitors, ought to be able to figure out how they get their results. But transparency won't be forthcoming in, say, the mortgage-lending business, if rating agencies are able to pick and choose from the estimation procedures they apply to the reams of data they are given by lenders. Naturally rating firms will shade their opinions to please the lenders.  Economists call this an "incentive-compatibility" problem.

Read the whole thing, which ties in neatly with questions about the subprime mortgage market and a whole lot more.

I interviewed Levy a few years back about his fantabulous book How the Dismal Science Got Its Name (short answer: because liberal economists in 19th century England sought to replace "natural" hierarchy with democracy).

More on dismal science here.