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“Experts” Can Get Us into Big Trouble

By | August 14, 2014 | 0 Comments

expert

If you talk fast, you may convince those who know one field that you are an expert in another field. The less people understand about what you are saying, the more they are likely to consider you brilliant.
– Murphy’s Law of Expertise

Consider David Xianglin Li. He was born in China and got an economics degree there. He then immigrated to Canada, where he got an MBA from Laval University and a PhD in statistics from Waterloo University. The irony of the latter is impossible to overstate.

Li’s brilliance soon became apparent – or was it that his brilliance was only apparent? As “Wired” magazine states, “…legions of math and physics PhDs were required to create, price, and arbitrage Wall Street’s ever more complex investment structures.” Li moved from academia to Wall Street, where he was working for JPMorgan Chase when he published an article that gained wide attention.

The article was titled, “On Default Correlation: A Copula Function Approach.” Li purported to show a new method for predicting the default of securities, but without considering historical data. That is, he claimed to have an innovative way to evaluate the safety of investments, one that did not require the labor of analyzing what that investment had done in the past.

To me, that looks too good to be true. But Wall Street executives loved the idea. Like many university-educated people, they had been taught to worship abstract intelligence and academic achievement rather than practical experience and common sense. To them, the fact that they did not understand Li’s method was a plus, not a minus. To them, this proved how brilliant Li was, not how credulous they were.

Li devised an equation that might have been simple to him, but was far too complex for Wall Street executives to understand:

Pr[TA<1,TB<1] = Φ2-1(FA(1)),Φ-1(FB(1)),γ)

There, is that perfectly clear? It might be, if you had a PhD in mathematics. And even then, you would not foresee the equation’s consequences in the real world of investments. But to an MBA, even from a prestigious business school, it might as well have been written in hieroglyphics. Nevertheless, the MBAs pretended to understand its implications.

And for a while, Li’s equation seemed to work. So long as the stock market and real-estate values continued to rise, it seemed that Li’s goose had laid a golden egg. But no one noticed − or at least admitted − that so long as the stock market and real-estate values continued to rise, almost any system would seem to work.

But then, despite Li’s assurances that historical market gyrations need not be considered, real-estate values and the stock market began to fall − as any reasonable person knew they eventually would. It became painfully obvious that Li’s goose had merely laid an egg.

After the bottom dropped out in 2008, Li pointed out that he had informed business executives of some of the drawbacks inherent in his method. He told the Wall Street Journal, “Very few people understand the essence of the model.” But was this a warning, or just a boast about his mathematical skill? It reminds me of an old joke: “I must be smarter than Einstein − only five people in the world understand him, and nobody understands me.”

Granted, Li’s equation was hardly the only cause of the economic mess. Greed and lack of moral principles surely played major roles, as did the pressure on banks from the federal government to make home loans to those unlikely to be able to pay them back.

The financiers thought Li was a mathematical genius, while the mathematicians thought he was a financial genius. He fell between two chairs, and he took a lot of people with him.

I believe that most of the executives knew they did not understand the implications of Li’s equation, but they were ashamed to admit it. I saw examples of this all through my medical training. Professors made statements that my colleagues and I did not understand, but none of us − including me − had the guts to say so at the time.

We were afraid that the others understood, and we didn’t want to be shown up as the only one who didn’t. And when an authority figure made a statement we considered wrong, few dared to challenge it. These are major pathologies of any bureaucracy.

Make no mistake − big business can be as bureaucratic as big government. The profit motive is no guarantee of anything except a desire to make a profit. It is surely no guarantee of competence. We see the results all around us. GM seems to be recalling more vehicles than it produces.

Li is now back in China, where he reportedly holds a high position in Beijing. Despite this highly suspicious sequence of events, few people ever heard of Li. Our media, usually so eager to blame problems on some boogey man, were strangely incurious after the economic crash of 2008. The crash came a few weeks before the election, and it may well have pushed voters toward Barack Obama. Perhaps the media didn’t want to look too closely at what they considered a stroke of luck. It helped their man win – who cared why it happened, and at just the right time, too?

This sad episode illustrates the danger of relying too heavily on people who appear to be experts in fields with which we are unfamiliar. It may be time to redefine our terms:

Perhaps it is time to redefine “intelligence” as the ability to foresee and solve actual problems, and not a number on a piece of paper.

Perhaps it is time to redefine “education” as learning actual facts and how to think logically, and not regurgitating the professors’ pet theories.

Perhaps it is time to redefine “the best and the brightest” as those who truly do good in the world, and not those who devise arcane theories, then attempt to twist reality to fit the theories.

Perhaps it is time to redefine “expert” as someone who actually does something skillfully, and not someone who uses complex computer models to predict events that don’t happen.

And then, perhaps we will again be served by business people whose businesses thrive, and by politicians whose policies make the country safer and more prosperous – rather than by clever people who fabricate clever theories to explain their clever failures:

● Financial “experts” told us that their computer models could prevent market crashes. But instead they presided over a virtual collapse of the economy.

● Health-care “experts” told us that HIV would spread quickly into the heterosexual population. But it remains largely confined to male homosexuals and intravenous drug users.

● Climate “experts” told us that human-caused global warming would cause disaster in 50 years. But their computer models did not predict what is happening now – no warming since the millennium.

● Education “experts” told us that more money would solve the problems of schools. But after many billions of dollars, schools have more administrators but flat test scores.

● Central-planning “experts” told us that Washington could direct the health care of all 318 million Americans, while saving money and improving quality. But expenditures rise while quality declines.

● Foreign-policy “experts” told us that if we weakened our military and withdrew from overseas, we would see decreased strife and receive increased respect. But worldwide strife accelerates while respect for America evaporates.

Someday we may have the sense to realize that self-anointed “experts” may not know what they are talking about. As Forrest Gump’s mother used to say, stupid is as stupid does.

Contact: dstol@prodigy.net. You are welcome to publish or post these articles, provided that you cite the author and website.

www.stolinsky.com

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