Friday, November 22, 2013

Should You Trust the Expert?

On the Washington Post website, Darden Business School Professors Yael Grushka-Cockayne and Kenneth C. Lichtendahl Jr., ask the provocative question: Is it better to trust the best expert, or the average of a group of experts?  They examine this question in the context of economists forecasting economic growth for the Wall Street Journal.  They remind us about the concept of "the wisdom of crowds" described so eloquently by James Surowiecki of The New Yorker.  Then, they describe research by two Duke professors, Rick Larrick and Jack Soll:

Rick Larrick and Jack Soll, business professors at Duke University, have shown that when given a chance to do so, people often prefer to rely on experts. In laboratory experiments, they found that where experts disagreed, people would deem the “most able” among them and trust that individual’s judgment more.  Despite this perception, the average forecast often outperforms the best individual’s forecast. Such outperformance happens when forecasts bracket the true result. 

In their column for the Washington Post, the two Darden Professors examine past data from the Federal Reserve Bank of Philadelphia, an institution that surveys economists and relies on averaging of the individual forecasts.  They found that, "The crowd beat the expert in 63 percent of the 40 quarters. Not surprisingly, any two forecasters in the survey often bracketed the truth, bracketing on average 28 percent of the time."   

No surprises here... we have known about the wisdom of crowds for some time.  What is fascinating is that people tend to want to rely on the individual expert.  They prefer the expert over the crowd... absolutely the wrong strategy.  

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