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Economic Hindsight: Me, Wrong? Never!

Expert
Expert
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One of psychology’s most reliable phenomena is “the overconfidence phenomenon”—the tendency, when making judgments and forecasts, to be more confident than correct. Stockbrokers market their advice regarding which stocks will likely rise while other stock brokers give opposite advice (with a stock’s current price being the balance point between them). But in the long run, as economist Burton Malkiel has repeatedly demonstrated, essentially none of them beat the efficient marketplace.

 

Or consider psychologist Philip Tetlock’s collection of more than 27,000 expert predictions of world events, such as the future of South Africa or whether Quebec would separate from Canada. As Nathan DeWall and I explain in Psychology, 12th Edition,

His repeated finding: These predictions, which experts made with 80 percent confidence on average, were right less than 40 percent of the time. Nevertheless, even those who erred maintained their confidence by noting they were “almost right.” “The Québécois separatists almost won the secessionist referendum.”

 

My fellow Worth Publishers text author and Nobel laureate economist, Paul Krugman, has described similar overconfidence and reluctance to admit error among economists and politicians.

  • When Bill Clinton raised taxes on the rich, conservative politicians and economists predicted economic disaster—but the economy instead boomed, with 23 million jobs added during the Clinton years.
  • When Kansas politicians passed large tax cuts with the promise that growth would pay for them, the result was an unexpected state funding crisis.
  • When, in 2008, the Federal Reserve responded to the recession by cutting interest rates to zero, conservative economists and pundits published an open letter warning of soaring inflation to come. But it hasn’t.

 

When none of the predicted economic outcomes happened, did the forecasters own their error and change their thinking? Contacted by Bloomberg, not one of the inflation open letter signatories acknowledged error. Instead, they offered (in Krugman’s words) “some reason wrong was right … and never, ever, an admission that maybe something was wrong with [their] initial analysis.”

Overconfidence—the human bias that our own Nobel laureate, Daniel Kahneman, would most like to eliminate—feeds another potent phenomenon, “belief perseverance”—our tendency to cling to our beliefs in the face of contrary evidence. The more we explain why our beliefs might be true, the more they persist. Thus we welcome belief-supportive evidence—about climate change, same-sex marriage, or the effects of today’s proposed tax cuts—while discounting contrary evidence. To believe is to see.

 

Perhaps, then, we should all aspire to a greater spirit of humility. Such recognizes, as I have written elsewhere, that

We are finite and fallible. We have dignity but not deity. [Thus] we should hold our own untested beliefs tentatively, assess others ’ ideas with open-minded skepticism, and when appropriate, use observation and experimentation to winnow error from truth.

About the Author
David Myers received his psychology Ph.D. from the University of Iowa. He has spent his career at Hope College, Michigan, where he has taught dozens of introductory psychology sections. Hope College students have invited him to be their commencement speaker and voted him "outstanding professor." His research and writings have been recognized by the Gordon Allport Intergroup Relations Prize, by a 2010 Honored Scientist award from the Federation of Associations in Behavioral & Brain Sciences, by a 2010 Award for Service on Behalf of Personality and Social Psychology, by a 2013 Presidential Citation from APA Division 2, and by three dozen honorary doctorates. With support from National Science Foundation grants, Myers' scientific articles have appeared in three dozen scientific periodicals, including Science, American Scientist, Psychological Science, and the American Psychologist. In addition to his scholarly writing and his textbooks for introductory and social psychology, he also digests psychological science for the general public. His writings have appeared in four dozen magazines, from Today's Education to Scientific American. He also has authored five general audience books, including The Pursuit of Happiness and Intuition: Its Powers and Perils. David Myers has chaired his city's Human Relations Commission, helped found a thriving assistance center for families in poverty, and spoken to hundreds of college and community groups. Drawing on his experience, he also has written articles and a book (A Quiet World) about hearing loss, and he is advocating a transformation in American assistive listening technology (see www.hearingloop.org). For his leadership, he received an American Academy of Audiology Presidential Award in 2011, and the Hearing Loss Association of America Walter T. Ridder Award in 2012. He bikes to work year-round and plays daily pick-up basketball. David and Carol Myers have raised two sons and a daughter, and have one granddaughter to whom he dedicates the Third Edition of Psychology in Everyday Life.