Books &Economic Behaviour Entropy | 05 Oct 2009
The Plot Between Ignorance and Arrogance
Wish to share an excerpt from insightful NYT Book review, a relevant Book published by Princeton University Press.
This Time is Different:
Eight Centuries of Financial Folly
Carmen M. Reinhart & Kenneth S. Rogoff
This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes–from medieval currency debasements to today’s subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much–or how little–we have learned.
The authors talks of the two culprits behind nearly every financial crisis: ignorance and arrogance. That is, people are ignorant of their own sordid financial pasts and current risk exposure, and arrogant about their invulnerability to a new catastrophe. Transparency, historical analysis and education can therefore go a long way toward preventing the next crisis, the authors suggested.
The public information is always a good thing. But for some reason, when it comes to additional financial information, mankind seems to have a problem correctly assessing the value of any new insight. Contra Socrates, it seems the more we know about finance, the more we think we know about finance. As Malcolm Gladwell said, “Incompetence is certainty in the absence of expertise. Overconfidence is certainty in the presence of expertise.”
So what’s the solution for this perverse conspiracy between ignorance and arrogance? How do we give people information to make better financial decisions, but temper their resulting hubris?
I’m not sure. Perhaps it involves educating officials and the public — through books like “This Time Is Different” — about not only economics, finance and history, but psychology, too.
© Via Economix Blog NYT.