Regulation of Charlatans in High-Skill Professions

That is a new paper by Jonathan Berk and Jules H. van Binsbergen, here is the abstract:

We study a market for a skill that is in short supply and high demand, where the presence of charlatans (professionals who sell a service that they do not deliver on) is an equilibrium outcome. We use this model to evaluate the belief that reducing the number of charlatans through regulation increases consumer surplus. We show that this belief is false: both information disclosure as well as setting standards reduces consumer surplus. Although both standards and disclosure drive charlatans out of the market, consumers are worse off because of the resulting reduction in competition amongst producers. Producers, on the other hand, strictly benefit from the regulation, implying that the regulation we observe in these markets likely derives from producer interests. The model provides insights into the parameters that drive the cross-sectional variation in charlatans across professions. Professions with weak trade groups, skills in larger supply, shorter training periods and less informative signals regarding the professional’s skill, are more likely to feature charlatans. We conclude that the number of charlatans in equilibrium is positively related to the value added of that profession to consumers.

How does financial advising fit into this schema?  Economic consulting?  Blogging?

For the pointer I thank the excellent Kevin Lewis.

Comments

Many markets have safety and other standards set via ratings agencies in the name of consumer protection. In fact they can achieve this goal but at the expense of competition from smaller players in the market. It's hard to measure if consumers are worse or better off because a lot of the risk reduction is tail risk. Measuring short term price effects is not a good counter argument.

Example: solar panels. They are pitched to break even verus 25 yr lifetimes. Wil they last this long?

Hard to know, but my 11 nine old 80W panel still reliably delivers around 74.5W in good conditions with a proper load - thinks several batteries charging at the same time. And that 80W was always the most optimistically legal figure that could be used. The break even on panels is not 25 years - that is their lifespan, the break even point is generally much earlier (this is extremely variable, but in Germany, people expect their solar panel installation to pay for themselves in under a decade - 5 or 6 years was possible in the past - while the remaining lifespan is revenue).

Admittedly, I have a German manufactured panel, not a Chinese one. If you buy a cheap Chinese panel, you get a lifespan that likely has little to do with what is claimed by the manufacturer. If my panel sinks to something less than 80% of its rated performance in the next 9 years, the manufacturer will then follow its guarantee terms (which I'm not searching for now) - assuming, of course, they are still in business. Basically, all the German solar installations have such guarantees, but the future is unknown.

This is true only if Ray gun trickle down economics is true but demand = wages = supply = m6 = s650 = f-22. TANSTAAFL

"We study a market for a skill that is in short supply and high demand" - what market is that? Apparently financial advisers, real estate agents, doctors, lawyers and accountants. I'm not sure that anything other than doctors are in 'high demand' or 'short supply'?

And this about the doctors is scary: " Another important feature of the data is that there is large variation across professions in the number of professionals convicted of misconduct as well as the standards imposed. For example, in an influential paper, Egan et al. (2016) document that in the financial services sector, 7% of active financial advisors have a misconduct conviction or settlement on their record. That paper also documents that about half of those advisors are fired, and about half of the ones fired find a new job in financial services. The median settlement amount for misconduct is $40,000. Contrast this to the medical profession. In medicine, Studdert et al (2016) find that a very small fraction of doctors (1%) are responsible for most malpractice settlements (32%), yet very few of those doctors are fired. In 2015 out of 931,921 licensed doctors in the US, only 290 doctors (0.03%) had their license revoked, and even temporary suspensions (706) are rare (0.075%).4 These facts are surprising given what is at stake"

"In 2015 out of 931,921 licensed doctors in the US, only 290 doctors (0.03%) had their license revoked": how does that compare internationally? For example, what proportion of UK doctors were "struck off", or Australian, or Dutch .....?

It's not supprising, it's just another case of researchers not understanding what they're presenting. License suspension in medicine is typically just for people who have violated the law. Professional standards are maintained though board certification, hospital privliges, and malpractice insurance. Controlled substance licenses can also be revoked separately from medical licenses.

Striking a blow for freedom, Prof. Cwoen is bravely using 'excellent' again.

And why would blogging fit into this at all? Or does one feel like a charlatan in more than one area, Prof. Cowen?

Surely the overall effects of such regulation are positive in the long run? E.g. if more people are incentivised to become actual service providers rather than charlatans? Or if the regulations lead to (and result from) people valuing the truth more highly, and questioning knowledge more intensely? What about if they incentivise people to be better educated, assuming it is less intellectually demanding to become a charlatan than to become a real professional? I haven't read the paper, but I find it very difficult to believe that charlatans have a net positive overall effect.

"We conclude that the number of charlatans in equilibrium is positively related to the value added of that profession to consumers."

Although, this research could be the work of charlatans.

That isn't what is said. The structures to remove or prevent charlatans is what has the negative effect.

A highly regulated industry ends up reflecting precisely the regulations and regulators. Sometimes that works, sometimes it doesn't. The tighter the regulations, providing service isn't, and in fact can't be the goal. The way to prosper in a highly regulated market is to exist at the edge of regulation, and/or write them for your benefit.

@Michael Wulfsohn - "Surely the overall effects of such regulation are positive in the long run? E.g. if more people are incentivised to become actual service providers rather than charlatans?" - good point. This is the idea behind Singapore giving a high salary to bureaucrats, so they are not tempted to become bribe takers (i.e., charlatans) when they run for office or do their unofficial duties. By contrast, in the Philippines politicians pay for votes, sometimes as high as $20 (which is about almost a week's pay, or a couple of days in Manila), under the understanding they will recoup their money with interest when they take office and accept bribes.

The legal profession has more charlatans per city block than any other.

What about politicians?

Most politicians in the US are members of the legal profession.

What about social science researchers?

Here is the obituary for John Sarno. https://www.nytimes.com/2017/06/23/science/john-sarno-dead-healing-back-pain-doctor.html? Who is John Sarno? He is the NYU doctor who claimed that most nontraumatic instances of chronic pain are physical manifestations of deep-seated psychological anxieties. Was he a high-skilled professional or a charlatan? My point is that the distinction between the high-skilled professional and the charlatan isn't always obvious. Is Donald Trump a high-skilled real estate developer or a charlatan?

Trump has clients willing to pay rent and fees to him for office space, time at his resorts, &c. It's pretty obvious to the client whether they're satisfied with Trump services or not.

Re the work of physicians, it' s less obvious. Re lawyers, less obvious still.

We show that this belief is false:

Uh huh. The biggest charlatans are academics, especially the intellectual onanists among them. Not much danger to anyone, but a terrible resource sink.

Doesn't it suck when high-motivation high-IQ people with a thirst for knowledge have access to budgets that cannot be controlled by corporations or the president.

There are highly motivated faculty, but faculty in general are not. The modal type is a chronic kvetch stewing over all the people he fancies are making his world worse, his students for starters.

Faculty, of course, have been given their head for nearly a century. What that got us was...women's studies.

While annoying in their ability to hoodwink the public, charlatans require the professional to up their game. Improve their efficiency and delivery of information.

Are there any bloggers who aren't charlatans? What does that even mean? That you don't write your own blog posts?

http://www.nature.com/news/publishing-the-peer-review-scam-1.16400

The issue is with the blue figure, as he struggles successfully over the green, speckled lake in Good Country (Gulluh) People. The blue figure and his invisible hand in Wise Blood. As Emory Campbell quoted Hillary Clinton, "For me, it is personal." And, Hemingway's Wild Blue Yonder (that it is in the Navy song should be rectified). And Jack Kerouac's blue roman candle in the speckled sky. The blues, you see, are about suicide. The suicide of the Obo's in St. Simon. Or Picasso's friend who killed himself and created his blue period. But the blues aren't really about that at all. They are about flying (see Hamlet page 23). In Song of Solomon, and remember Mark Twain's favorite word is Solemn, the blue wings are instead used to fly, like the Obo's at St. Simon. Well bymeby I'll fly away, Oh brother, Where "art" thou. Our father in "nada" who art "nada" as James Joyce, the bluenacre, snotgreen, and rusted modularity of an agrarian economy.

The blue figure is the wild figure in the back of one's head going from tree to tree. The blue figure was held there as if by invisible hand and he would spring across the lake without a change of expression on his face. The blue figure is Krishna.

"We show that this belief is false: both information disclosure as well as setting standards reduces consumer surplus."

It seems unlikely this is one size fits all. It may not matter much if Dr. Oz tells us watermelon is a superfood, but it may matter a lot if he can say it is more effective than chemotherapy.

I see. I would be better off if I could find no information about a professional's previous scams, and legal means of holding them to standards would be bad for me.

In an imaginary world where 'legal means' don't cost more than the work you had performed, maybe.

Would you be willing to pay for a service where there is an equally competent professional watching over the shoulder of the one you hire? I didn't think so.

In BC, the Association of Professional Engineers, a self regulated body, has an experienced engineer periodically audit a project done by their members. They go through the design process, check the calculations, check the whole process to see if all the due diligence was done properly. This practice was established after a serious incident of a grocery store roof collapsing on shortly after opening. None of the due diligence was done in this instance.

That is find as far as it goes. But those same professional associations make it extremely difficult and costly to get rid of an engineer who doesn't perform. They are never held accountable for their work; try proving professional incompetence. First you have to find an engineer to say so, which is against their professional ethics. Second you have to spend large amounts of money. If you are lucky and have a clear cut failure where someone is killed, then it becomes possible.

In practice, the engineers in my experience don't really know, end up shuffling off the actual design to sales engineers, and are excellent at everything except putting together a working system for a reasonable cost.

There are really good ones, and there are awful ones. Almost like a free for all market place where reputation and references are more important than some artificial credential.

People who hire engineers are generally part of large organizations with significant budgets to ensure quality oversight, and a major interest to avoid potentially ginormous liability.

Individual consumers who obtain services from professionals are in a much different situation.

Exactly. Large organizations hire credentialed professionals to delegate responsibility and risk. Poorly run organizations hire consultants for everything to avoid having to make a decision and bear the consequences.

"How does financial advising fit into this schema? Economic consulting? Blogging?"

Presidenting?

Software Engineering is a skill in high demand, short supply, zero trade group regulation, and which has many charlatans. Just a data point.

'Software engineering' is not a trust-invested occupation in the sense that medicine or law or tax preparation is. They do not have the general public as their clientele.

True, but the authors do not limit their claim to that domain (at least not in the quoted text). The claim seems equally valid if we substitute "employers" for "consumers".

So compare that to hiring a lawyer. Or a mechanical engineer to design a heating system for your commercial building. You will find an equally wide array of skills and abilities. It isn't the credentials, it is, as in computer programmers, their experience and their reputation that matters.

It would be really nice in an imaginary world where everything can be decided in a room where the chairs are aligned and the meetings are prompt to be able to choose from a list of credentialed people, hand off the responsibility to them and have excellent, cost effective work done.

That isn't how it works, never has, never will. No matter how exquisite the regulatory structure.

Data Science has an even larger proportion of charlatans, likely because it's a newer field and less well-defined.

Regulation has a cost.......and decent people is OK with that cost.

If electricians were unregulated the overall cost of a new house would be lower yielding higher average consumer welfare. People that hired charlatans could die in a blaze, but if that happens in 0.0001% of houses is low risk....so why worry about licensing and standards? I think most of regulations don't make sense if evaluated in dollars, there are morals behind them. We want less losers, even if the price is higher for everyone.

Perhaps this optimization of resources makes sense in regions where people lives with less than 1 USD per day. But, if we pay more for large houses that we never use entirely, we pay for cars with 300+ HP for street use because freedom, we consume "luxury" goods and services every day.......why not pay more for regulations that minimize bad outcomes even if the overall price is higher?

Why can't we just be trusted to make our own decisions about what risk to take rather than being forced to accept the view of a regulator who is subject to the bureaucratic calculation ? Of course there are externalities, but taking doctors as an example, there are few externalities if I decide I want to hire a doctor not medically certified.

I would prefer a system of trade marks that it would be illegal to infringe. Thus a doctor who claimed they were certified by say John Hopkins, but wasn't, would face severe penalties. Similarly if I claimed by house was wired by an electrician certified by a local trade college and it wasn't true, I would be held legally liable. The advantage of this approach vs mandatory regulation is that certifications that no-one cared about would wither away.

There are negative externalities to you choosing a bad solution to infectious disease, or choosing bad wiring for your home.

That freedom to swing an arm met a nose in the 19th century, and public safety laws resulted.

https://www.cdc.gov/tb/programs/laws/menu/caseid.htm

beau brummels 66 mono

Unlike say the AMA and ABA, the AEA (American Economic Association) is not a cartel because there are no barriers to entry. There's no licensing, no bar exam, no certificates; anyone can declare "I am an economist" and proffer so-called expert economic advice.

There's also a large number of charlatans in economics.

How does economics fit into Berk & Binsbergen's model? I guess it depends on what is their estimated value to consumers.

Well, OK.

I only looked briefly at the paper and the intuition explaining the results.

I didn't notice anything about variances, risk, etc.

You can prove a lot if you leave out important things.

This kind of anti-empirical toy model building to support an agenda is everything that's wrong with the modern economics discipline.

Again, without a close reading, it seems to me that the method of generating the signal is a little suspicious.

Skilled producers generate 1 + a random variable. Unskilled generate 0 + the R.V.

My guess is that a bit of attention to this whole process, including signal costs, might raise some issues for the model.

Seems like a new application of a pretty simple idea about the world in general. I think it's been called "no corner solutions" under normal conditions. The implication would be that no trade offs exist and so it's not really an economic setting if that were the case.

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