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Tuesday, July 19, 2011

Being "Completely Ignorant of Everything" is a Very Bad Idea

The Republicans are trying to dismantle the information gathering ability of the Treasury's new Office of Financial Research, an agency charged with providing "data and economic analysis to federal regulators":

Dodd-Frank-Created Stats Office Comes Under Fire, by Victoria McGrane, WSJ: For the most part, Treasury’s new Office of Financial Research has gone unnoticed... But the new office and the man in charge of setting it up – former chief U.S. economist for Morgan Stanley, Richard Berner – felt some heat this afternoon.
The subject of an oversight hearing Thursday, the investigating subcommittee’s chairman, Rep. Randy Neugebauer (R., Tex.) criticized the office’s data-collecting mission as “Orwellian”..., and painted an image of powerful bureaucracy with no limits on how much it can spend or what information it can demand from the industry, a characterization echoed by many of his Republican colleagues.
Author and investor Nassim Taleb, one of the witnesses at the hearing, described the office in his prepared testimony as an attempt to create “an omniscient Soviet-style central risk manager.” ...
Mr. Berner sought to temper the Frankenstein-like descriptions of the OFR. He said the office’s goal is to “fill in information gaps, not duplicate” data collection that’s already going on among financial regulators. ...
Mr. Taleb’s critique of the OFR ... is directed at the whole concept of creating a body to try to measure risk in the financial system. ...
In his testimony, Mr. Taleb said that “[f]inancial risks, particularly those known as Black Swan events cannot be measured in any possible quantitative and predictive manner; they can only be dealt with [in] nonpredictive ways.” He argued that trying to do what the OFR is designed to do could actually increase risks, in part by increasing “overconfidence” in the information’s ability to predict the next crisis.

I wasn't surprised at all by Republican attempts to undermine regulators, but I was surprised by Nassim Taleb's endorsement of flying blind. Brad DeLong explains why the argument is "incomprehensible:

If Victoria is accurately summarizing Taleb, he is incomprehensible. His argument is that you should actively seek to be completely ignorant of everything, for if you learn something then you will be overconfident about how much you know and will run unacceptable risks as a result. Better to just shut your eyes and act completely at random. And that makes no sense.

    Posted by on Tuesday, July 19, 2011 at 10:08 AM in Economics, Politics, Regulation | Permalink  Comments (43)


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