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Beware of geeks bearing formulas. That’s the lesson most of us have learned from
the financial crisis. The “quants” who devised the risk models that induced so
many financial institutions to buy mortgage-backed securities thought they had
reduced risk down to zero.
Turns out they got a few things wrong. Their formulas were based on only a
few years of actual data. Or they failed to take into account the possibility
that housing prices would fall. Or that the market for mortgage-backed
securities might suddenly stop functioning.
The lesson seems clear. Don’t allow a whole system to become hostage to the
workings of some geek’s formula. Keep in mind the possibility that the real
world might not behave as the formula indicates.
But, astonishingly, our society seems about to forget that lesson, just as it
should have been learned. Congress is poised, at least if the Obama
administration gets its way, to pass major new laws on carbon emissions and on
health care whose success depends on geeks bearing formulas.
Consider carbon emissions. Carbon dioxide is a harmless gas, not a pollutant.
But geeks bearing formulas tell us that increasing amounts of it will heat up
the world’s climate and cause catastrophic damage some decades hence. Al Gore is
so certain of this that he tells us all debate must end; disagreeing is like
denying the Holocaust.
But the Holocaust happened, while the disasters that Gore predicts have not.
When you try to predict climate, you are dealing with even more factors and more
unknowns than when you try to predict financial risk. Prudent people will want
to hedge against some risks that seem possible. But imposing huge costs on the
private sector economy–raising the price of electricity for everybody–solely
on the basis of some geeks’ formulas seems, well, not prudent. But that’s what
Barack Obama tells us we must do.
Or consider health care. One element of proposed health care reforms is
restricting care to procedures that are indicated as optimal by “quality
metrics.” The Obama campaign called for comparative effective research to
produce such metrics. The problem, as Dr. Jerome Groopman of Harvard Medical
School points out, though not in these words, is that the geeks keep producing
different formulas. Or as Dr. Scott Gottlieb of the American Enterprise
Institute writes of the comparative effectiveness research mandated in the
House-passed stimulus package, “The results of studies are always being made
obsolete by new science.”
There is a more general problem here. The risk models of the financial geeks,
the climate models of the environmental geeks and the medical models of the
health care geeks are all ultimately forms of social science. But social science
ultimately is not science but art.
The geeks use numbers to try to understand the world. And their work is
helpful, up to a point. We can measure the damage to our economy better today
than during the 1930s because people then didn’t know what the gross national
product was. The geeks had not yet invented the formula.
As an avid consumer of political and demographic data since childhood, I am
not inclined to say that statistics and formulas are worthless. Rather to the
contrary. I grew up knowing that I was one of 1,849,568 people living in Detroit
in 1950, and the Census Bureau’s estimate that there are only 916,952 people
living there today tells you something worth knowing.
But numbers are not reality; they are just clues. In 1965 Daniel Patrick
Moynihan, perhaps the most perceptive social scientist of recent times, looked
at the numbers of black babies born out of wedlock and predicted a grim future
that came to pass. But it was not just the numbers, but his own experience as a
fatherless child, that produced this insight.
The financial “quants” failed to realize what a trip to subprime mortgage
territory in California’s Inland Empire might have told them.
The climate modelers work with historical data that do not necessarily
predict future weather patterns. The medical statisticians cannot know the human
factors that prompt a sensitive clinician to make lifesaving decisions. Geeks
with formulas can help us understand the world better and make informed
decisions. But the collapse of our financial institutions tells us that we would
be fools to rely on them completely in ordering our great institutions.
Michael Barone is a resident fellow at AEI.
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