Blame Politicos, Not Reinhart & Rogoff


“A great many people think they are thinking when they are merely rearranging their prejudices.”

-William James


Reinhart and Rogoff are being blamed for the damaging, widespread adaption of post-crisis austerity programs in Europe and in the United States. This reflects a fundamental misunderstanding of how political decision get made.

Regardless of what you think of either R&R, austerity or its opposite, stimulus spending, this blame on two academics is not based on how most Humans make decisions. After years of studying investor behavior, I believe this newly discovered conclusion is actually inverted — it is opposite to how people make their decisions — especially ideological driven politicians.

Academia presents a buffet of theoretical options. Amongst the intellectual cognoscenti — those academics who toil in the world of abstract thought — this is a normal part of their process. We have an academic equivalent of millions of typing monkeys trying to produce Shakespeare — only most of the output is peer reviewed and challenged by other experts. This should inexorably lead us towards a basic form of Truth regarding specific aspects of society. Indeed, this is how soft sciences like Sociology, Political Science and Economics eventually develop and refine their understanding of how human society functions.

When policy makers and politicians get involved, we run into trouble. They have no interest in pursuing the “Truth” — rather, they look for rationales for what they have decided they want to do regardless. It is confirmation bias writ large. They seek out that which agrees with their preconceived notions, and adapt it as a rationale for what they already believe in.

Did Reinhart and Rogoff persuade many politicians to forgo stimulus and embrace austerity? I am unsure that their error-laden, cherry-picked data really convinced any one who wasn’t already leaning in that direction. Indeed, the fact that their magnum opus was never peer reviewed tells you much about how serious it was as an academic work. That is much more revealing about the people who championed the paper than it is about the paper itself. We now know it was little more than junk science, but it fit the pre-existing narrative of those who favor smaller government. They adopted it not despite of its flaws, but rather because of them. It said exactly what it was they wanted to hear, so why bother having it peer-reviewed?

If the thinking process of investors is flawed, filled with cognitive errors and biases, imagine what the process is like for ideologues and political types. The bottom line is that, just as investors seek out those articles, research reports and commentary that support their existing portfolios, so too do politicians look for similar writings that confirm their pre-existing notions.

We know that human thinking all too often is a flawed process which quite often resembles little more than James’ “rearranging of their prejudices.” We might as well blame farmers for obesity; they grow lots of different foods, but they do not force anyone eat french fries.

We as a society run into a problem when we confuse confirmation bias with thought — especially in the political arena.




Confusing Cause & Effect: Elections and Markets  (January 9th, 2008)

Are You an Investor or a Story Teller? (April 25th, 2013)

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