Pundits and Stress

Of Note: Stress-testing banks and pundits getting things wrong, by Mark Chussil

“The more feted by the media, the worse a pundit’s accuracy.” So reports Sharon Begley in Newsweek. Her article “Why Pundits Get Things Wrong” is a must-read for anyone placing big bets or assessing predictions. (Update: see also Joel Lovell on “What Do They Know?“, from the Washington Post.) She covers confidence, dismissing opposing views, knowing “one big thing,” sound bites and swagger, and the cognitive styles of foxes and hedgehogs.

Why, then, does our world make punditry a viable occupation? We might infer from Ms. Begley’s article that we humans (or at least media moguls) are apparently more attracted to punditry’s sound bites and swagger than we are repulsed by its negative track records. I’m not saying that pundits try to be wrong and I’m not saying that pundits don’t care if they are wrong; on the contrary, I believe that they believe what they say and I believe that they want to be right. Nonetheless, I find the data Ms. Begley cited about fame versus accuracy and hedgehogs versus foxes more compelling than pundits’ confidence.

(Tangential questions: Are pundits causes or effects? Does anyone consider himself or herself a pundit? Am I following a self-defeating strategy by seeking fame through the world’s foxiest blog about business strategy and strategic thinking?)

So if we shouldn’t trust those who have (merely) achieved fame, how should we decide whom to trust? Fame may not be a prerequisite, but it doesn’t follow that obscurity is. Let us note that we don’t even trust positive track records. For example, I might tell you that I’ve perfectly predicted the movements of the Dow, awards from the Academy of Motion Picture Arts and Sciences, and the career of Rafael Nadal. I won’t tell you that, partly because it’s not true and partly because I hadn’t heard of Rafael Nadal before I researched this blog post. (Do not consult me for sports predictions.) But just imagine, for blog post’s sake.

Most of us care about the why behind the track records before most of us will trust future predictions. If I emphasize my sterling credentials and innovative technologies, you might be inclined to believe my astounding track record. If I reveal that I base my predictions on the number of nuggets in each family-sized box of Post Grape-Nuts, you will walk away. Most of you, that is. Some will race out and buy Grape-Nuts and try to break my code, while pundits at Post scramble to explain why they knew all along that sales would rise.

So, deciding where to place our trust is not only a matter of the person making the predictions. It is also a matter of where those predictions come from. And as I’ve mentioned numerous times on these e-pages, track records alone aren’t enough. See, for instance, It’s Working! and The Good, the Bad, and the Lucky.

Speaking of track records, the Wall Street Journal reports that the Obama administration proposes to stress-test banks to ensure they can withstand a “dark economic scenario.” As veterans of business war games and decision tournaments, both of which stress-test competitive strategies, we at ACS have seen the positive effects of such efforts in numerous industries, and I believe the Administration’s move will help the banks help themselves. Moreover, requiring that most large banks can withstand such a stress-test will make it harder for banks to outperform competitors by taking on excessive risk, thereby leveling the playing field and avoiding future replays of the risk-race that contributed to the present crisis.

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You touch on a very broand and interesting topic with Pundits. Without over simplifying, much of this can be grouped into human nature. Their is a comfort in believing that there is always an expert that knows all of the answers. Whether they are right or wrong does not seem to deter us from wanting to believe. Suzi Orman is a good example of a Pundit that according to the press has no real credentials and yet her opinion is saught on so many news shows.

As far as stress testing goes, call me a skeptic. Banks have supposidly been doing stress testing for a while and we see what that has achieved. They rally around Basel II and all of the measures and testing associated were ill utilized because they were in the end self regulated. I agree that the fact that the government is beginning to require it is a step forward but some real changes in how this is done are needed before they stress testing yeilds any value.

Mark Chussil

Thanks, Jeff.

I definitely agree that it’s largely (or more) about human nature. It sort of has to be, because there’s no rational reason why we humans would listen to people who are consistently wrong or, at best, unverifiable. Wanting answers seems important at a basic level. I think of the attack on skater Nancy Kerrigan. When she was crying (all caught on camera, how nice), she kept wailing “why?” This was a human being in an unguarded, primal moment, and what she wanted was to know why.

The details of how banks are being stress-tested are unclear, at least to me, and I share both your hope and your skepticism. I did/do not mean to express an opinion of the methods being used to stress-test banks. Having conducted stress-tests that toughened many companies’ competitive strategies, what I meant to applaud is the desire to stress-test banks.