Why Bryan Caplan almost always wins his bets
By Scott Sumner
[This is aimed at clarifying my previous post, which David commented on.]
Bryan almost always takes the consensus view in any bet. The view a betting market would take, if one existed. When I first hear about a new Caplan bet, I almost always agree with him, and think that he’s likely to win the bet. The other side of the bet puts too much weight on their own subjective view. They forget that they are nothing special, and that the smart bet is the consensus view, not the particular hypothesis that they have fallen in love with, because it’s theirs.
Most people (perhaps including me) tend to overweight the probability that their views on religion, politics, economics, sports, and art are correct. (On art, by “correct” I mean that the work of art is likely to be perceived that way in the distant future.)
In terms of my area of specialization, monetary policy, I take the following view:
I do not believe that the Fed should set interest rates where Janet Yellen thinks is appropriate, or where John Taylor thinks is appropriate, or where I think is appropriate. Rather interest rates should be set where the market thinks they are most likely to lead to good macroeconomic outcomes. Yellen and Taylor (and me?) do have an important role to play in figuring out what “good macroeconomic outcomes” means.
There is one possible flaw in always marking our beliefs to the market consensus. It’s been pointed out that if everyone believed the EMH made it impossible to consistently beat the market, then no one would do the research necessary to make the EMH true. Thus we need lots of individual actors trying to figure out where stocks should be valued, and forming opinions independent of the current market price. Otherwise the EMH does not work. But they should also be wise enough to know that they are nothing special, and hence they should advise their mother to invest in index funds, not their own hedge fund. That’s what I mean by realizing that you are nothing special. You are merely a worker ant making the EMH more true.
In macro, it’s important for people like me to always search for the truth, and reach conclusions about economic models in a way that is independent of the consensus model. In that way, I play my “worker ant” role of nudging the profession towards a greater truth. But at the same time we need to recognize that there is nothing special about our view. If we are made dictator, we should implement the consensus view of optimal policy, not our own. People have trouble with this, as it implies two levels of belief about what is true. The view from inside our mind, and the view from 20,000 miles out in space, where I see there is no objective reason to favor my view over Krugman’s.
In the Middle Ages, people believed their own religion was the one true faith, and used public policy to try to make most of society adhere to this one faith. They could not understand the concept of the view from 20,000 miles out. In the enlightenment (after Copernicus), philosophers realized that we have no privileged position to decide the one true faith, and that public policy should not favor any one religion.
I also believe that public policy should not try to reshape our population more along Republican or Democratic lines, as we don’t know which party’s views are correct. Thus immigration policy should be neutral, except about characteristics for which there is a broad consensus that they are desirable or undesirable. (Say Nazi views, or totalitarian communist views, which are clearly wrong.)
PS. There was some confusion about my recent denial of personal identity. Most people believe there is a “you” that possesses a brain, and a “you” that possesses a body. I don’t, I believe there’s merely a brain and a body, no “you”. This confusion shows up in discussions of free will. In this recent Atlantic article, the writer discusses the implication of there being no free will for optimal criminal justice policy. I agree with the writer about there being no free will, but he fails to understand that this view has no implications for criminal justice policy. The optimal policy is the one that maximizes aggregate utility. But if you look at any economic model of crime you’ll immediately see that the model works exactly the same whether free will exists, or it does not exist. There is no special “FW” variable in the model’s equations, which is one if free will exists, and zero if it does not. Since the free will assumption has no practical implications for behavior, it’s best to assume that free will does not exist, which also means that there is no personal identity, just a brain spinning out one thought after another, according to the laws of science (plus chance?). I know others won’t agree with me, I merely provide this to explain my view.