Education vs. Money Management
By Arnold Kling
Consider the following two propositions, one in education (E) and one in finance (F).
(E) One way to improve education would be to get rid of the bottom 10 percent of teachers and to try to replicate more widely the techniques used by the top 10 percent of teachers.
(F) One way to improve financial markets would be to get rid of the bottom 10 percent of money managers and to try to replicate more widely the techniques used by the top 10 percent of money managers.
What is interesting is that I know many economists who believe (E), although they may be skeptical that the best teaching can be replicated. However, I do not know any economists who believe (F). Certainly, no suggestion like it was ever made while economists were discussing financial reform. What accounts for the difference between the belief in (E) but not in (F)? Some possibilities:
1. (E) is true beyond all doubt, and (F) is false beyond all doubt.
2. (E) and (F) are both true in some sense, but the market has already solved the problem of pushing out bad money managers and replicating as far as possible the techniques of the top money managers. In education, the absence of market forces is the problem.
3. They are both true, but public policy needs to worry much more about education than finance. However, consider: could you have prevented the financial crisis if in 2003 you had gotten rid of some of the worst performers from All the Devils are Here and instead replicated the heroes of The Greatest Trade Ever (also found in The Big Short)?
4. Both (E) and (F) are false, but economists have much softer priors about (E). That is, economists are strongly inclined to believe that outstanding performance in money management is luck. As a result, when someone claims to find something like (F), you can be sure that a significant effort will be expended on research designed to disprove that finding. On the other hand, economists would, if anything, like to believe (E), so that when someone claims to find something like (E), relatively little effort is expended trying to disprove that finding.
I put most of my money on (4).