Category: Education

My Conversation with Jamal Greene

Here is the audio, video, and transcript.  Here is part of the summary:

Jamal and Tyler discuss what he’d change about America’s legal education system, the utility of having non-judges or even non-lawyers on the Supreme Court, how America’s racial history influences our conception of rights, the potential unintended consequences of implementing his vision of rights for America, how the law should view economic liberty, the ideal moral framework for adjudicating conflicts, whether social media companies should consider interdependencies when moderating content on their platforms, how growing up in different parts of New York City shaped his views on pluralism, the qualities that make some law students stand out, and more.

Here is one excerpt:

COWEN: There is a crude view in popular American society — even possibly correct — that, simply, American society is too legalistic. There’s that book, Three Felonies a Day. If you have expired prescription medicine in your cabinet, you’re committing a felony. People who are very smart will just tell me, “Never talk to a cop. Never talk to an FBI agent.” I’m an upper-class White guy who’s literally never smoked marijuana once, and they’re telling me, “Don’t ever speak with the law.”

Isn’t something wrong there? Is the common intuition that we’re too legalistic correct?

GREENE: I think that we are too apt to submit political disputes to legal resolution. I think that for sure. What your friends are telling you about police officers is slightly different, insofar as one can have a deeply non-legalistic culture in which the correct advice is to not talk to police officers if those people are corrupt, if those people are abusive.

When I hear that advice — and I might be differently situated than you — that’s what people are saying is, someone might be out to trick you. And that might be a mistrust of state power, as you mentioned before. Maybe it’s a rational mistrust of state power, but I don’t know that that’s about legalism, which again, is a separate potential problem.

We tend to formulate our problems in legal terms, as if the right way to solve them is to decide how they are to be resolved by a court, or how they are to be resolved by some adjudicative official, as opposed to thinking about our problems in terms of just inherent in, again, pluralism, which has to be solved through politics, has to be solved through conversation.

COWEN: But we still have whatever is upstream of the American law, the steep historical and cultural background, so anything we do is going to be flavored by that. We’re not ever going to get to a system where the policemen are like the policemen in Germany, for instance, or that the courts are like the courts in Germany.

Given that cultural upstream, again, isn’t the intuition basically correct? Just be suspicious of the law. We should have fewer laws, rely less on the legal process, in essence, deregulate as many different things as we can. Why isn’t that the correct conclusion, rather than building in more rights?

Interesting throughout.

Fact Checking Increases Fake News

Florian Ederer and Weicheng Min have an interesting new paper called Bayesian Persuasion with Lie Detection which shows that under some conditions fact checking can increase fake news.

How does lie detection constrain the potential for one person to persuade another to change her action? We consider a model of Bayesian persuasion in which the Receiver can detect lies with positive probability. We show that the Sender lies more when the lie detection probability increases. As long as this probability is sufficiently small, the Sender’s and the Receiver’s equilibrium payoffs are unaffected by the presence of lie detection because the Sender simply compensates by lying more. However, when the lie detection probability is sufficiently high, the Sender’s equilibrium payoff decreases and the Receiver’s equilibrium payoff increases with the lie detection probability.

The paper is difficult so here’s my stab at the intuition.

Suppose that politicians always want war but war is not always good. If voters can always detect a lie, politicians would always report war-is-good only when war was good and not-war when war was bad. Now suppose that voters can never detect a lie and also that the true probability of war being good is low. In this case, if politicians always report war-is-good then the voters would always ignore the politicians and choose no-war. But suppose that politicians always report war-is-good when war is good but sometimes report war-is-bad when war is bad (and, of course, sometimes report war-is-good when war is bad). In this situation, voters could be better off listening to politicians than ignoring them completely and the politicians will also be better off because they will get war more often—always when it is good and sometimes when it is bad. So, even though they always want war, how often should politicians report war-is-bad when war is bad? Just enough so that the voters are indifferent between following the politician’s advice and ignoring it altogether. In other words, voters have a threat point—ignore the politician completely. Knowing this threat point, politicians should tell the truth just enough so that voters prefer following the politician’s advice to ignoring them completely. Thus, even though voters can never detect a lie, politicians should sometimes tell the truth.

Now assume that there is (imperfect) lie detection. It’s immediately obvious that holding all else equal voters will be better off because now they will detect some of the times politicians say war-is-good when in fact war-is-bad. But precisely for this reason, all else will not be held equal, politicians will now report war-is-good when it is bad more often, i.e. they will lie more often. Working “backwards”, the voters threat point—ignore the politicians altogether—hasn’t changed and so their expected utility won’t change but that means that lie detection can’t make them better off and the reason is that politicians will lie more often.

In fact, lie detection doesn’t help the voters unless it is very accurate–perhaps more accurate than in our world.

Note that in this model voters cannot punish politicians for lying nor is there any opportunity for politicians to signal, to take costly actions that could separate truth tellers from liars. The model is all about “senders” and “receivers” of information–it’s a model of Bayesian persuasion not Bayesian punishment. In a model with punishment the ability to detect lies–even the ability to detect lies ex post–could result in more optimistic scenarios. Similarly, signaling might help, at the expense of some cost.

Nevertheless, the lesson I take is that information revelation is rarely pure. Information revelation is strategic–what is revealed and when it is revealed are choices in a game that may have complex and counter-intuitive equilibria.

For more, see Peter Coy’s interesting article on Bayesian persuasion in the New York Times.

The Parent Trap–Review of Hilger

Nate Hilger has written a brave book. Almost everyone will find something to hate about The Parent Trap. Indeed, I hated parts of it. Yet Hilger is willing to say truths that are often not said and for that I would rather applaud than cancel.

Hilger argues that the problems of poverty, pathology and inequality that bedevil the United States are not primarily due to poor schools, discrimination, or low incomes per se. The primary cause is parents: parents who are unable to teach their children the skills that are necessary to succeed in the modern world. Since parents can’t teach the necessary skills, Hilger calls for the state to take their place with a dramatic expansion of not just child care but collective parenting.

Let’s unpack some details. Begin with schooling. It’s very common to bemoan the state of schools in the “inner city” or to complain about “local financing” which supposedly guarantees that poor counties will have underfunded schools. All of this, however, is decades out-of-date.

A hundred years ago there really were massive public-school resource gaps by class and race. These days, however, state and federal spending play a larger role than local property tax revenue and distribute educational resources more progressively….In fact, when we include federal aid, 42 states spent more on poor school districts than on rich school districts in 2012. The same pattern holds between schools within districts

….The highest spending districts are large urban centers such as New York City, Boston and Baltimore. These cities spend large sums to educate rich and poor children alike. p. 10-11

Hilger is correct. No matter what you saw on The Wire, Baltimore spends more than sixteen thousand dollars per student, among the highest in the nation in large school districts and above average for the nation as a whole. Public schools are quite egalitarian in funding with any bias running towards more funding for poorer districts.

Schools, Hilger writes are “actually the smallest and most equalizing part of a much larger skill-building system.” The real problem, says Hilger, are parents.

But what about discrimination? When it comes to wage discrimination, Hilger is brutally honest:

If we compare individuals with similar cognitive test scores, Black college graduates earn higher wages than white college graduates. Studies that don’t control for test score differences but examine earnings gaps within specific professions—lawyers, physicians, nurses, engineers, scientists—tend to find Black workers earn zero to 10 percent less than white workers. These gaps could reflect discrimination, unmeasured skill differences, or other factors such as geography. In any case, such gaps are small compared to the 50 percent overall Black-white earnings gap and reinforce the idea that closing skills gaps would go a long way toward closing income gaps.

Hilger argues that racism does play an important role in explaining Black-white wage differentials but it’s the historical racism that made black parents less skilled and less able to pass on skills to their children. In the twentieth century, Asians, Hilger argues, were discriminated against in the United States at least much as Black Americans. But the Asians that came to the United States had high skills while the legacy of slavery meant that Black Americans began with low skills. Asians, therefore, were better able to overcome discrimination. The success of Nigerians and Jamaican immigrants in the United States also speaks to this point.  (Long time readers may recall that in 2016 I dubbed Hilger’s paper on Asian Americans and Black Americans the Politically Incorrect Paper of the Year .)

Parental investment is surely important but Hilger overstates his case. He writes as if poorer parents have neither the abilities nor the time to teach their children while richer, better educated parents simply invest lots of hours and money imbuing their children with skills:

…the enormous variation in parents’ own academic skills has big implications for kids because we also demand that parents try to be tutors. During normal times, parents in America spend an average of six hours per week helping—or trying to help—their kids with school work. Six hours per week is more than K12 math and English teachers get with children…good tutoring by parents for six hours a week, every week, year after year of childhood could raise children’s future earnings by as much as $300,000.

The data on the effectiveness of SAT test-prep suggests that these efforts are not nearly so effective as Hilger argues. The parental investment story also doesn’t fit my experience. I didn’t spend six hours a week helping my kids with their homework. I doubt most parents do. I simply assumed my kids would do their work. I do recall that we signed my kids up for tutoring at Kumon, the Japanese math education center. My kids would complain bitterly when we took them for drill on the weekend. It was mostly filling out rote forms and my kids would hide or bury their drill sheets so we were always behind. Driving my kids to the Kumon center, monitoring them. and forcing them to do the work when they rebelled like longshoreman on work-to-rule was time consuming and it was ruining our weekends. I felt guilty, but after a while, my wife and I gave up. Today one of my sons is a civil engineer and the other is a math and economics major at UVA.

Hilger has an answer to this line of objection, or at least he says he does, but to my mind it’s a very odd answer. He argues, relying heavily on Sacerdote, that adoption studies show that more skilled parents result in more skilled kids. I find that answer odd because my reading of Sacerdote is that the effect of parents are small after you control for genetics—this is, as Hilger acknowledges, the conventional wisdom among psychologists. (See Caplan for an excellent review of the literature). It is true that Sacerdote plays up the effect of parents, but it looks small to me. Here is the effect of the adopted mother’s maternal education on the child’s education.

As you can see there is an effect but it is almost all from the mother going from having less than a high school education to graduating high school (11 to 12 years). In contrast, the mother can move from graduating high school to having a PhD and there is very little change in the education level of an adoptee. Note, however, that the effect on non-adoptees, i.e. biological children, is much larger throughout the entire range which suggests the influence of nature not nurture.

I am not surprised that there is some effect of parental education on child’s education because going to college is in part a cultural issue. Parents can influence cultural aspects of their children’s identity such as whether a child grows up up nominally Catholic, Mormon, or Hindu but they have relatively little effect on child religiosity, let alone personality or IQ. I think that a large fraction of the college wage premium is signaling (50% is a moderate estimate, Caplan thinks 90% is closer to the truth), so I am also not overly excited about college attendance as a marker of success.

The effect of parental income on the income of child adoptees is even more dramatic than on education—which is to say negligible. The income of the adopted parents has zero effect (!) on child’s income even as parent’s income varies by a factor of 20! The only correlation is with non-adoptee income—which again suggests the influence of nature not nurture.

At this point in the book, it was almost inevitable that we were going to get yet another paean to the Perry Preschool Project and indeed Hilger waxes enthusiastically about Perry. Seriously? The Perry Preschool project started in the 1960s and had just 123 participants (58 in treatment and 65 in control!). There are more papers about the Perry Preschool project than there were participants. I am jaded.

Aside from the small sample size, the project had imperfect randomization and missing data and most importantly limited external validity. The Perry Preschool project treated a small group of disadvantaged African American children with low-IQs (IQs of 70-85 were part of the selection criteria). The treatment is usually described as “active learning pre-school” but it was more intrusive than that. Every week counselors would go to the homes of the kids to teach the parents (mostly mothers) how to raise their children. The training was important to the program. Indeed, Hilger notes, without sense of irony, that “facilitating greater skill growth in low-income children was so complicated that it required home visitors with advanced postsecondary degrees.” (p. 89). And what were the results?

The results were good! (Heckman et al. 2010, Belfield et al. 2006). But in the popular literature the impression one gets is that the program took a bunch of disadvantaged kids and helped them read and write, making them more middle-class and successful. Some of that happened but the big gains actually happened because the participants, especially the boys, were so socially dangerous and destructive that even a bit of normalization made life substantially better for everyone else. In particular 82% of the treated group of 33 males had been arrested by age 40, including for one murder, 4 rapes, 8 robberies, 11 assaults and 14 burglaries. The control group were worse. In the control group of 39 males there were 2 murders. Indeed the reduction of one murder in the treatment group accounts for a significant benefit of the entire Perry PreSchool project.

Hilger, to his credit, is reasonably clear that what is really needed is an intensive program for disadvantaged African Americans, especially males. In a stunning sentence he writes:

The more we rely on families rather than professionals to build skills in children, the tighter we link people’s current prospects to the prospects of their ancestors. p. 134

But he soon forgets or papers over the context of the Perry Preschool project and like everyone else in the literature uses this to support a national program for which there is no external validity. It’s hard to believe, given the lack of external validity, but Heckman et al. (2010) only exagerate mildly when they write:

The economic case for expanding preschool education for disadvantaged children is largely based on evidence from the HighScope Perry Preschool Program…

Hilger’s case for the difficulty of parenting is well taken—the FAFSA was a nightmare that taxed two PhDs in my family. But the bottom line is that most parents do just fine. Moreover, it’s shocking that in recounting the difficulties of parenting Hilger says hardly one word about an obvious factor which makes parenting more than twice as hard. Namely, single parenting. I was a single parent. Once for a whole week. Don’t do it. Get married, stay married. Perhaps Hilger didn’t want to appear to be too conservative.

Instead of recommending marriage and small targeted programs and more experiments, Hilger goes full Plato.

What would it look like if we [asked]…less not more of parents? It would look like professional experts managing more than the meagre 10 percent of children’s time currently managed by our public K12 system—much more. p. 184

And why should we do this? Because we are all part slaves and part slave-owners on a giant collective farm:

As fellow citizens who benefit from tax revenue, we all—even those of us without children—collectively own about 30 percent of any additional income other people’s children wind up earning. p. 197

Ugh. We own ourselves, not one another. Society isn’t about maximizing the collective it’s about free individuals coming together to produce rules so that we can enjoy the benefits of collective action while still living in a diverse society that respects individual rights, beliefs, and ways of living.

I told you I hated parts of The Parent Trap but Hilger has written an interesting and challenging book and he is mostly right that neither schooling nor labor market discrimination play a major role in the black-white wage gap. Hilger is probably also right that we spend too much on the elderly relative to the young. The idea of greater state involvement in the raising of children is on the table today in a way it hasn’t been for some time. See also Dana Susskind’s recent book Parent Nation. Changes on the margin may be warranted. Nevertheless, I stand with Aristotle and not Plato in thinking that raising children is better done by parents than by the state.

Air Pollution and Student Performance in the U.S.

We combine satellite-based pollution data and test scores from over 10,000 U.S. school districts to estimate the relationship between air pollution and test scores. To deal with potential endogeneity we instrument for air quality using (i) year-to-year coal production variation and (ii) a shift-share instrument that interacts fuel shares used for nearby power production with national growth rates. We find that each one-unit increase in particulate pollution reduces test scores by 0.02 standard deviations. Our findings indicate that declines in particulate pollution exposure raised test scores and reduced the black-white test score gap by 0.06 and 0.01 standard deviations, respectively.

That is from Michael Gilraine and Angela Zheng.  Maybe you, like me, do not find any one of these studies to be a real clincher.  But please do reread Alex on the sum total of the evidence…and here.

Colombian sentences to ponder

His close colleague, fellow senator Iván Cepeda, says Petro’s ideas transcend traditional left-right boundaries. “He has been inspired by many sources . . . he has a solid Marxist foundation but has also read a lot of French post-structuralism and other political traditions. He is also a serious economist . . . who has read thinkers like Naomi Klein and is in dialogue with [French economist Thomas] Piketty”.

And this:

If Petro wins in Colombia and if, as recent polls suggest, former Brazilian president Luiz Inácio Lula da Silva pulls off what would be a momentous comeback victory in October, the seven most populous nations in Latin America — Brazil, Mexico, Colombia, Argentina, Peru, Venezuela and Chile — will all be under leftwing rule.

Here is more from the FT.

The Demand and Supply of Misinformation

Bryan Caplan reminds us that misinformation wouldn’t work well if people weren’t so irrational.

The [standard misinformation] story focuses exclusively on the flaws of speakers, without acknowledging the flaws of the listeners. Misinformation won’t work unless the listeners are themselves naive, dogmatic, emotional, or otherwise intellectually defective. In economic jargon, the problem is that the story mistakes an information problem for a rationality problem.

The motivation for this crucial omission is fairly obvious. Blaming listeners for their epistemic vices sounds bad. It makes the accuser sound elitist, if not arrogant. Blaming a few high-status liars for the world’s problems is a lot more compatible with Social Desirability Bias than blaming billions of low-status fools who fail to choose to exercise their common sense.

I agree but it’s an equilibrium process. The demand and supply of misinformation both matter. Moreover, it’s not implausible that social media has increased the supply of misinformation, essentially because it has greatly accelerated the evolution of memes. As Dawkins taught us, memes evolve like genes but in the past memes evolved like rabbits, more rapidly than human beings but not so rapid that we couldn’t keep up. Now memes evolve like viruses, mind viruses. Even worse we have made improving memes profitable so we have capitalist energy added to faster random mutation.

I am somewhat hopeful that social media hit us hard because it was novel. A generation raised on social media may have more natural immunity–assuming we survive the infection. I also encourage (as does Bryan) institutions like betting markets to raise the price of misinformation (a bet is a tax on bullshit). Betting markets and expert aggregation markets like Metacuulus can help. We should invest more in the support and prestige of tools for developing rational consensus. More generally, if we can’t raise the cost of misinformation, better tools to aid our limited rationality could reduce the demand.

Sentences to ponder model this

Consistent with beauty-blind admissions, alumni’s beauty is uncorrelated with the rank of the school they attended in China. In the US, White men who attended high-ranked schools are better looking, especially attendees of private schools. A one percentage point increase in beauty rank corresponds to a half-point increase in the school rank.

Here is more, via the excellent Kevin Lewis.

Cryptoeconomics!

The crypto market is up! The crypto market is down! The roller coaster can be fearfully thrilling but as thoughtful academics and people interested in ideas let’s look away from the daily ups and downs and focus on the big picture. What is crypto? What is cryptoeconomics?

Tyler and I have written a new chapter for our textbook, Modern Principles. In Cryptoeconomics we explain just enough cryptography–namely cryptographic hash functions and public-private keys–to understand what new forms of communication and organization have been made possible by these breakthroughs. We then use these fundamentals to explain NFTs, blockchains, Bitcoin, smart contracts and decentralized finance–all in a crisp, compact format accessible to everyone.

Not everyone wants to teach crypteconomics, of course, or has the time (scarcity!) so this chapter will be available as an option to anyone using our book and the Achieve online course management system (in fact, it’s available now). Tyler and I have found, however, that our students, colleagues, even people at dinner parties ask us about crypto. Probably your students and friends will ask you as well. Plus our textbook is called Modern Principles so we thought we were obligated to teach these new ideas!

Cryptoeconomics is a good guide to some fundamentally new ways of trading, communicating, and cooperating.

Addendum: If you want to learn more about DeFi, my talk goes into greater depth.

My Conversation with the excellent Daniel Gross

This is Daniel Gross my co-author on Talent and the venture capitalist, to be clear.  And here is the audio and transcript.  Of course we focus on talent and also:

They also explore the question of why so many high achievers love Diet Coke, why you should ask candidates if they have any good conspiracy theories, how to spot effective dark horses early, the hiring strategy that set SpaceX apart, what to look for in a talent identifier, what you can learn from discussing drama, the underrated genius of game designers, why Tyler has begun to value parents more and IQ less, conscientiousness as a mixed blessing, the importance of value hierarchies, how to become more charismatic, the allure of endurance sports for highly successful people, what they disagree on most, and more.

Excerpt:

GROSS: Well, take a step back. Why are we even here? And why would I even have a shred of an interesting opinion on talent? To the extent that I do, I think it’s because in the venture business — much more so than, I think, almost any other business — you live in constant paranoia of missing out on great talent. You might say, “Well, that’s true in every company.” And it’s true at the Met when you’re looking for someone to play in the orchestra, too. But in the venture business, unlike others, great talent always looks very weird to whatever convention is.

Before Mark Zuckerberg came along, that phenotype of the hoodie sweatshirt and slightly aspie kid was not the common phenotype. Now, of course, there was a phase — 2013, 2014, 2015 — where everyone started looking for that. But then it hit you again with a very weird-looking person, where Vitalik [Buterin] is of a completely different ilk than Zuck. One very much is Julius Caesar, and I think another one — I don’t exactly know how you’d bucket Vitalik — maybe like an early pope.

COWEN: Like a Russian holy saint.

GROSS: Exactly. By the way, not just the person is weirder than whatever the conventional norm is, but the idea is weird, too.

Interesting throughout!

What is the best interview question of all time?

That is the topic of my latest Bloomberg column, also picked by the WaPo.  Excerpts:

What are the open tabs in your browser right now?

…First, the question measures what a person does with his or her spare time as well as work time. If you leave a browser tab open, it probably has some importance to you and you expect to return to the page. It is one metric of what you are interested in and what your work flow looks like.

It’s not just cheap talk. Some job candidates might say they are interested in C++ as a programming language, but if you actually have an open page to the Reddit and Subreddits on that topic, that is a demonstrated preference…

The question also tests for enthusiasm. If the person doesn’t seem excited about any of those open browser tabs, that may be a sign that they are blasé about other things as well. But if you get a heated pitch about why a particular website is the best guide to “Lord of the Rings” lore, you may have found a true nerd with a love of detail. That will be a plus for many jobs and avocations, though not all.

There is much more at the link, and to consider some other competing questions, do see my new book with Daniel Gross Talent: How to Identify Energizers, Creatives, and Winners Around the World, publication date is today!

And do note that this particular question comes from Daniel.

Infant Formula, Price Controls, and the Misallocation of Resources

For the week of April 3, at least 12 states faced out of stock rates higher than 40 percent, including Connecticut, Delaware, Montana, New Jersey, Rhode IslandI’ve been reluctant to write about the shortage of infant formula simply because it’s so tiring to say the same thing over and over again. Obviously, this is a classic case where the FDA should allow imports of any food or baby formula approved by a stringent authority. (Here’s the US Customs and Border Patrol bragging about how they nabbed 588 cases of infant formula from Germany and the Netherlands as if it were cocaine.) Scott Lincicome has an excellent run down which covers not just the FDA but the problems caused by trade regulation and the WIC program as well.

What I want to do is focus on something less discussed: Why does the shortage vary across the country and even city by city?

I believe one reason is implicit price controls, either due to fear of regulatory backlash, regulatory constraints through other programs, or a misplaced desire not to upset consumers.

Price controls create shortages–that much is well known–but they also create a misallocation of goods. No doubt you have seen pictures from the 1970s of long lines of cars waiting to get gasoline. But there weren’t lineups everywhere at all times–rather we had the strange situation where there were shortage of gasoline in some places while, just a hundred miles away, there was plenty. Or shortages one day and surpluses the next.

Prices rationally allocate goods across space and time in response to shifts in demand and supply. If demand increases in one place, for example, prices rise, creating an incentive to bring in supplies from elsewhere. A rising price signals where supplies are needed and creates an incentive to deliver. Or, as Tyler and I put it, A price is a signal wrapped up in an incentive. A price controlled below the market price creates a shortage and it also kills the signaling and incentive function of prices. The result is allocational chaos: Shortages in some places and times and excess supply in other places and times.

In fact, price controls in a capitalist economy give you a window onto a planned economy. If you think of communism as a system of universal price controls this allocation chaos is the essence of why a communist state cannot rationally allocate resources.

Tyler and I discuss allocational chaos in our chapter on price controls in Modern Principles of Economics. See also this excellent video.

Some blurbs for *Talent*, with Daniel Gross

Talent” is what happens when two brilliant and profoundly iconoclastic minds apply their imagination to one of the hardest of all business problems: the search for good people. I loved it.”

–Malcolm Gladwell

“Talent is everything―whether in investing and building startups, or in other creative endeavors. Between product, market, and people, I’ve always bet on the last one as the biggest predictor of success. But while talent may be everywhere, it’s unevenly distributed, and hard to ‘find.’ So how do we better discover, filter, and match the best talent with the best opportunities? This book shares how, based on both scientific research and the authors’ own experiences. The future depends on this know-how.”

―Marc Andreessen, co-founder of Netscape and Andreessen Horowitz

“The most important job of any leader is to find individuals with a ‘creative spark,’ and the potential to discover, invent and build the future. If you want to learn the art and science of spotting and empowering exceptional people, Talent is brimming with fresh insights and actionable advice.”

―Eric Schmidt, co-founder of Schmidt Futures and former CEO of Google

“I do not know of any skills more worth developing than the ability to find exceptional undeveloped talent. I have spent many years trying to get good at that, and I was still astonished by how much I learned reading this book.”

Sam Altman, CEO of OpenAI, formerly of YCombinator

“Two of the premier talent spotters working today, Cowen and Gross have written the definitive history of identifying talent. Anyone who is interested in innovation, entrepreneurship, or the roots of America’s start-up economy must read this book.”Christina Cacioppo is CEO and co-founder of Vanta

You can order here on Amazon or here on Barnes & Noble.

Recommended!

“If economists are so smart, why aren’t they rich?”

Peter Coy (NYT) considers a few hypotheses.  My take here is pretty simple.  Here are three of the main ways to beat market returns:

1. Build a new product and sell it successfully.

2. Assemble and maintain an especially talented team of quants.  (It is a separate but still relevant question at what scale you can do this and thus how rich you can become.)

3. “See” something about the market, at least for a limited period of time, that other people do not and invest accordingly.  That might be falling interest rates, the rise of consumer tech, or the persistence of low inflation (all until recently!).  Note that #3 requires you to have some money in the first place, and for your run to be long enough that you truly become rich.

Putting aside generic demographic factors, there is no particular reason to expect #1 or #2 to be much correlated with expertise in economics.

You might think that #3 is somewhat correlated with expertise in economics, but I don’t think it is very much.  You can pile up a bunch of ancillary reasons why economists might not be practically oriented enough to succeed at #3.  But even putting all that aside, economic theories of “regime change” just aren’t very good!  (It is comparative statics that we excel at, but that knowledge can be replicated and sold cheaply to the rest of the investment community, if it turns out to be valuable.)  So knowing economics won’t correlate much with success at strategy #3.  And some of those non-economists who succeed at #3 are just lucky anyway.

And that is why, dear reader, most economists are not very rich.  You are correct in downgrading their intelligence for these reasons, though there are still some regards in which they are quite smart, such as having ability at hypothesis testing, or perhaps having the ability to ask very good and penetrating questions about economic issues.