Tuesday, April 21, 2009

Does theory make you blind?

From a recent interview with Daniel Kahneman:

"In the last half year, the models simply didn't work. So the question arises: Why do people use models? I liken what is happening now to a system that forecasts the weather, and does so very well. People know when to take an umbrella when they leave the house, or when it will snow. Except what? The system can't predict hurricanes. Do we use the system anyway, or throw it out? It turns out they'll use it."



“The interesting psychological problem is why economists believe in their theory, but this is the problem with the theory, any theory. It leads to a certain blindness. It's difficult to see anything that deviates from it."

We only look for information that supports the theory and ignore the rest.

"Correct. That appears to be what happened with Greenspan: He had a theory under which the market operates, and that the market would correct itself."

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