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Tuesday 22 Aug 2017 | 11:50 | SYDNEY
Tuesday 22 Aug 2017 | 11:50 | SYDNEY

Thinking about thinking about the financial crisis



8 October 2008 10:54

Yesterday I linked to an article which argued that the key to good decision-making lies in thinking about thinking, or what the psychologist Philip Tetlock refers to as 'the art of self-overhearing'. The idea, I think, is that well-practised introspection can help us avoid common cognitive traps.

As it happens, I've stumbled on a number of useful blog posts this morning which discuss precisely that issue, and specifically how these various traps have landed us in the present financial mess. Here's a list, starting with the best piece, which should be your must-read of the day:

  • Atlantic Monthly blogger and economist Megan McArdle lays out all the thinking mistakes that led to the financial crisis: confirmation bias, bandwagoning, overconfidence etc. No one is blameless, and it's remarkable how similar some of these errors are to ones made in other systemic failures: one that comes immediately to mind is the various pre-war intelligence assessments about Iraqi WMD.
  • Kevin Drum argues that pundits are overstating the effect of the financial meltdown on the presidential race, and that longer-term factors offer a better explanation. This goes to the common cognitive tendency to give too much weight to recent events.
  • Also on this theme, Michael Clemens from the Center for Global Development calls for some historical perspective: '...many of the most worrisome recent crises are small bumps on a very long road.'
  • But contra Clemens, Matt Yglesias argues that because we're used to thinking about the Great Depression as the very worst case, we lack the imagination to think that it might get worse. I think what he's trying to say is that these mental boundaries might impede clear thinking about how we deal with the crisis.
  • Finally, here's a lecture by Clay Shirky on information overload. Shirky's an expert on the social and economic implications of the internet, and although this lecture is perhaps slightly off the topic of this post, it is relevent to the claim that the modern financial system is uniquely (and perhaps dangerously) complex. Information overload is not the problem (that's a permanent condition), it is that our means of filtering information may not be working. (Also, here's Shirky's blog.)

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