Institute for Financial Transparency

Shining a light on the opaque corners of finance


Arrogance isn’t a defense

I am still amazed by the sheer amount of arrogance displayed by economists and finance professors.  They remind me of the guy continuing to pretend to be the Wizard of Oz even after the curtain has been pulled back and he is revealed not to be a wizard.

Humility is a normal response when the theories one espouses have been shown to be wrong.

None of the models used by macro economists helped them to predict the biggest economic event of their professional life, the financial crisis.  Yet, macro economists argue to this day they have to continue to be arrogant because otherwise their policy recommendations won’t be heard over the recommendations of ideologues.  It may be true arrogance is needed if you want to be heard over ideologues, but why exactly anyone should listen to the policy recommendation of someone who failed to predict the financial crisis is of course never answered.

One of the major finance models, the efficient market hypothesis, also failed when the financial crisis occurred.  This model was used to justify advocating for less regulation under the assumption everyone has perfect information.  Instead of acknowledging some securities are opaque, finance professors arrogantly argue this information must be available as opaque bank stocks and opaque structured finance securities trade.  Yes these securities trade, but that doesn’t mean they aren’t opaque. The Bank of England’s Andrew Haldane calls banks “black boxes”.  I refer to structured finance securities as brown paper bags as they are designed to hide the performance of the collateral backing the security.

An explanation for why banks and structured finance securities trade might be found in how the buy-side is organized.  There are many asset managers who have to buy bank stocks (think index funds or funds that are limited to investing in banks) or structured finance securities.  If they don’t buy these securities, they would be out of a job.  Of course, if these asset managers had to disclose they were blindly betting with the investors money when buying these securities, the asset managers would also be out of a job.

Of course, there is nothing a non-PhD can say that will pierce the arrogance of either economists or finance professors and result in their acknowledging what you say might have merit.  After all, they will simply label you an ideologue who must be talked over.

In Transparency Games, I show transparency is the foundation on which both economic and finance models are built.  Common sense suggests this must be true.  Otherwise, economists and finance professors would be arguing blindly betting results in the same positive outcomes as informed decision making.

For myself, I prefer to be a humble ideologue who believes informed decision making results in positive outcomes.  I will leave it to the arrogant economists and finance professors to argue blindly betting is a good thing.