Wednesday, May 11, 2011

Data is no substitute for thinking

Bubble, bubble, toil and trouble

Robert Shiller argues that the last two recessions could have been avoided if we had better data on financial markets and the economy (See: Needed: A Clearer Crystal Ball). That is self-serving nonsense. The problem wasn’t measurement; it was interpretation. In addition, one cannot ignore counterproductive responses even among people who correctly interpret the available information.

It seems curious that Shiller, of all people, would be arguing that the bubbles in stocks during the internet bubble or housing during the housing bubble could not be seen from existing data. Shiller, after all, saw both bubbles in existing data. Perhaps the issue is that Shiller sees a bubble in any data he analyzes, just as some people never see a bubble no matter what data they see. More data won’t solve that problem.

There will always be differences of opinion no matter how much data is available. People can look at the same data and react differently. There are people who can’t resist participating in a bubble. Some see it as a bubble and want to “game” the bubble. Others think it’s a new world and don’t see it as a bubble at all. However, even when the interpretations are the same, reactions differ. Some people move away from bubbles. Others feel they can’t stop dancing while the music is playing, to paraphrase Charles Price who destroyed Citi Bank with his dancing.

The emphasis on more data seems to originate from a na├»ve belief that if we all had better information there would be an obvious path we’d all want to follow. Yet, given history, there’s no reason to think that would be the case. For example, there are numerous people who consider the years of the internet bubble a glorious period. Just ask a Democrat about the Clinton era if you doubt it. Similarly, even Shiller hasn’t gotten over the housing bubble; he still talks about housing prices as if one’s home where an asset rather than a place to live.

It seems to me that the call for more data is based on the strong desire for more group think. Witness the negative reaction to those who publicly refuse to participate in a bubble or invest in ways to profit despite the bubble. The truly dangerous trend isn’t lack of data needed to identify bubbles. It’s the people who demonize those who see a bubble and act on that knowledge; then there are those like Shiller who pretend the bubble itself is the problem.

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