Look, for instance, at mutual fund managers. They take absurdly huge fees from our retirement savings, but the vast majority of mutual funds in any given year will underperform the S&P 500 and other passive benchmarks. . . .
Or look at political experts. In the early 1980s, Philip Tetlock at UC Berkeley picked two hundred and eighty-four people who made their living "commenting or offering advice on political and economic trends" and began asking them to make predictions about future events. He had a long list of pertinent questions. Would George Bush be re-elected? Would there be a peaceful end to apartheid in South Africa? Would Quebec secede from Canada? Would the dot-com bubble burst? In each case, the pundits were asked to rate the probability of several possible outcomes. Tetlock then interrogated the pundits about their thought process, so that he could better understand how they made up their minds. By the end of the study, Tetlock had quantified 82,361 different predictions.
After Tetlock tallied up the data, the predictive failures of the pundits became obvious. . . . Most of Tetlock's questions had three possible answers; the pundits, on average, selected the right answer less than 33 percent of the time. In other words, a dart-throwing chimp would have beaten the vast majority of professionals. Tetlock also found that the most famous pundits in Tetlock's study tended to be the least accurate, consistently churning out overblown and overconfident forecasts. Eminence was a handicap.
But here's the worst part: even terrible expert advice can reliably tamp down activity in brain regions (like the anterior cingulate cortex) that are supposed to monitor mistakes and errors. It's as if the brain is intimidated by credentials, bullied by bravado. The perverse result is that we fail to skeptically check the very people making mistakes with our money. I think one of the core challenges in fixing our economy is to make sure we design incentive systems to reward real expertise, and not faux-experts with no track record of success. We need to fund scientists, not mutual fund managers.