Sunday 14 December 2008

Experts Can Only Guess as We Head Into the Unknown

THE SUNDAY TIMES: American Account

“DON’T project beyond the range of the known observations” is a rule followed by careful economists. In plain English this means, for example, that we know how American consumers behave when petrol prices move between $1 and $4 a gallon, “the range of the known observations”. But we haven’t much of an idea what consumers would do if prices rose to $5 — no experience, no data to inform our forecasts. Which is why we have to be very careful when predicting the effect of the various policies that are being adopted to fight the credit crisis and recession. We simply have no experience of this combination of events.

So we have reason to worry about the galaxy of stars that Barack Obama has assembled to help him right the American economy. They are so bright, so self-confident, so accustomed to being the smartest guy or girl in the room, that doubt is not one of the emotions with which they are familiar, as was true of the bright young “quants” (mathematical economists) who designed the models used to manage the risks taken on by Lehman Brothers and AIG. Something about hubris and nemesis comes to mind. >>> Irwin Stelzer | Sunday, December 14, 2008

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