Wednesday, January 21, 2009

Do economists suffer from groupthink?

Robert Shiller argues that they do:

In his classic 1972 book, “Groupthink,” Irving L. Janis, the Yale psychologist, explained how panels of experts could make colossal mistakes. People on these panels, he said, are forever worrying about their personal relevance and effectiveness, and feel that if they deviate too far from the consensus, they will not be given a serious role. They self-censor personal doubts about the emerging group consensus if they cannot express these doubts in a formal way that conforms with apparent assumptions held by the group.

I was connected with the Federal Reserve System as a member the economic advisory panel of the Federal Reserve Bank of New York from 1990 until 2004, when the New York bank’s new president, Timothy F. Geithner, arrived. That panel advises the president of the New York bank, who, in turn, is vice chairman of the Federal Open Market Committee, which sets interest rates. In my position on the panel, I felt the need to use restraint. While I warned about the bubbles I believed were developing in the stock and housing markets, I did so very gently, and felt vulnerable expressing such quirky views. Deviating too far from consensus leaves one feeling potentially ostracized from the group, with the risk that one may be terminated.

Of course, economists have different incentives in their roles as expert advisers and academics. In the latter role, there is a strong reputational incentive for non-conformism (think Milton Friedman, whose claim to fame is his prediction that the mainstream Keynesian models of the time would fail.)

Hat tip to Uwe Reinhardt.


___________________________ said...

Well, actually the issue with academics is that they also suffer from pushes towards groupthink. Lower status academics will be excluded quickly from journals if they deviate, and higher status academics will have had to already show their worth while they were less known academics, and moves away from orthodoxy rarely pay off, particularly given that newer theories usually are at a disadvantage in proving their worth.

Friedman's own shift was probably more successful than average due to the fact that his views were consonant with those in the intellectual history of the field, and given the fact that they still were not full rejections of the new Keynesian, but rather modifications. He also already had a good reputation for his work in other aspects of economics, such as methodology, and had some connection to other major figures as he had been a student of Chicago economists before(some were highly influential) and his doctoral advisor also won a Nobel Prize.

Keynes's shift had different strengths though as he was already one of the major figures in the field at the time, he was a disciple of economist guru Alfred Marshall and son of a prestigious economist, and the field had come face-to-face with a major failure that was considered hard to fit into the current theory.

However, a person more strongly outside of the mainstream having a major influence seems even harder to justify. Groupthink seems as if it would be a factor in all sciences, particularly social sciences.

Skeptikos said...

I was thinking more that Friedman was successful because, first, he challenged the economic orthodoxy, and second, because reality undeniably backed him up.

I'm not saying all challenges to the orthodoxy are encouraged, but the ones with a good chance of being successful are.

In other words, the nonconformists who can back up their views with solid evidence are encouraged to do so.

The incentives aren't the same in the kinds of situation Shiller described, mainly because there's not much in the way of consequences. Let's say you're one of the many economists who predicted incorrectly- what are the consequences for you, personally? Not much, probably nothing at all.

I like to use betting markets (like Intrade), when I can, because of this. Gives people an incentive to be right.