Wednesday, February 15, 2012


The Pretence of Knowledge was the title of the 1974 Nobel Prize lecture by Friedrich Hayek. It was a declaration of intellectual war against socialism and the attempts to control society from the state. Almost forty years later, the pretence of knowledge can be used in an opposite ideological sense. Those that promote the idea that economic, social and financial problems should be fixed by an elite of insulated expert regulators (an idea inseparable from economic elites that emanated from the Washington Consensus), separated from public opinion and the political process, are also putting essential decisions in the hands of agents who often have the pretence of knowledge. Xavier Vives told me in an IESE presentation I gave today on “Behavioral Regulators” that the pretence of knowledge is especially common in the field of macroeconomics. Experts are essential in a complex society, but they should be used to help democracy and not to undermine it. It is precisely because nobody can know everything that democracies and expertise need to find a better coexistence. Experts’ mistakes have been a key component of the recent global financial crisis. Auditors, accountants, regulators, central bankers, professional investors, all of them have made huge mistakes. Experts are subject to biases as well as lay citizens are, and in some cases these biases are even stronger in the case of experts. Overconfidence, availability, hindsight, illusion of control, are biases that are well documented in the case of experts. Overconfidence is positively correlated with the perception of expertise, and the pretence that some things are knowable when they are not is one of the biggest problems that experts should learn to recognise.

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