If an ordinary person messes up the square root of 64, one might give it a pass. But if a mathematician does it, you should think twice about what they stand to gain by being wrong. This is a common case in politics, where people blame politicians for being stupid or incompetent instead of correctly understanding the real agenda behind their actions. In this way incompetence becomes a smokescreen for deceit. This is also very common practice in banking and on Wall St., since stupidity is not illegal whereas almost everything else is.
There are many examples of this, but in this article someone going by the name Mathbabe breaks down renowned statistician Nate Silver’s analysis of so called failed economic models. The important bit is here:
Silver gives four examples what he considers to be failed models at the end of his first chapter, all related to economics and finance. But each example is actually a success (for the insiders) if you look at a slightly larger picture and understand the incentives inside the system. Here are the models:
The housing bubble.
The credit rating agencies selling AAA ratings on mortgage securities.
The financial melt-down caused by high leverage in the banking sector.
The economists’ predictions after the financial crisis of a fast recovery.
Here’s how each of these models worked out rather well for those inside the system:
• Everyone involved in the mortgage industry made a killing. Who’s going to stop the music and tell people to worry about home values? Homeowners and taxpayers made money (on paper at least) in the short term but lost in the long term, but the bankers took home bonuses that they still have.
• As we discussed, this was a system-wide tool for building a money machine.
• The financial melt-down was incidental, but the leverage was intentional. It bumped up the risk and thus, in good times, the bonuses. This is a great example of the modeling feedback loop: nobody cares about the wider consequences if they’re getting bonuses in the meantime.
• Economists are only putatively trying to predict the recovery. Actually they’re trying to affect the recovery. They get paid the big bucks, and they are granted authority and power in part to give consumers confidence, which they presumably hope will lead to a robust economy.