Rejects crisis criticism

'Every time there's a crisis, everyone knows that the economists will take a hiding,' says NHH professor Erik Ø. Sørensen. But the fact that crises cannot be predicted is not particularly worrying, Sørensen believes, because it is in the nature of financial crises that they come as a surprise.

10.01.2013 - Sigrid Folkestad

Past crises are a small, but legitimate research field, but even specialists do not see it as particularly worrying that crises cannot be predicted, Professor Erik Ø. Sørensen at the Department of Economics believes.

'On the contrary, it is almost seen as a victory for the field, because we believe that it is in the nature of financial crises that they come as a surprise,' Sørensen says.

Satisfied with the situation

Sørensen is one of the co-authors of the article 'Fairness and the Development of Inequality Acceptance', which was published in Science (2010). The authors were the first all-Norwegian social science research group to be published in this journal.

Sørensen believes that economists themselves do not worry much about being unable to predict financial crises, exchange rates, house prices and other phenomena that concern many people.

'Some people probably believe that the field should engage in some soulsearching after the recent crises, but most economists are happy with the situation.'

Do you think this can provoke people?

'Every time there's a crisis, everyone knows that the economists will take a hiding. In both national and international debates, "experts" emerge from the shadows propounding strange theories that they can now claim have been strengthened. And every time, the media focus a little bit more on these strange theories.'

The Choice Lab

'However,' Sørensen says, 'these theories are not normally a topic of discussion at conferences, workshops or in articles in reputable scholarly journals. Just as often as these "experts" make statements to the media, critical newspaper articles are published that question how anyone could have been this wrong.'

'Some economists are more present in the media than they are in journals and research environments.'

The professor is a researcher at The Choice Lab centre at NHH, where he and his colleagues study how people make financial and moral choices, and the ways in which authorities, companies and organisations can utilise knowledge from this research to better understand and improve their own decision-making.

Personal

Don't economists learn from their mistakes?

'Yes, I believe they do. People are generally quite bad at learning from their own mistakes, but I don't think economists are worse than anybody else. But very few of them find that they personally have made mistakes in relation to the financial crisis.'

Why aren't economists more concerned with crises?

'Considering how quickly financial markets operate and information flows, I'm not certain that we have actually had more or more frequent financialcrises now than in the past. What I'm saying is that no one can predict with certainty when a financial crisis will strike. That doesn't mean that it's impossible to prevent some potential crises by implementing competent measures, but few, if anyone, knows these things exactly.'

The worst of the nonsense

'Economists are not happy that unemployment is growing in large parts of the world or that people cannot pay their bills. But we are reasonably satisfied with the condition of economics as a discipline. Most economists do not feel that predicting crises is part of their professional lives.'

You are very critical about what you talk to the media about yourself?

'There are economists who think that almost any topic on which we can speculate is better than what incompetent know-it-alls can grab the media's attention for. I think we should have more trust in people's intelligence and their ability to sort out the worst of the nonsense themselves.'

So there's no cause for alarm?

'We would be more worried if it were impossible to predict the outcome of simple situations where it is easy to identify the players and their respective interests,' says Sørensen.

Deviations from the standard model

Road tolls and unemployment benefit are two of the examples he mentions.

'Road tolls result in less people using the roads. When the authorities pay unemployment benefit, unemployed people are willing to spend more time looking for good jobs. These are simple, but robust predictions that are closely related to assumptions we make about motivation and rationality.'

The researchers at The Choice Lab work on controlled experiments in which they study behaviour in situations where the researchers control the financial incentives.

'They have identified a large number of deviations from the standard model. For example, we now know that people are even willing to share their resources with complete strangers and anonymous people, and that they are concerned with the division of resources being fair in a way that respects relative effort.'

That is why he does not believe that it is correct to say that the field of economics refuses to learn from its mistakes.

'Our fundamental understanding of individual behaviour is changing. This has been found in a number of experiments in economic research in recent years.'

Sørensen believes that economists' inability to predict financial crises is largely an issue in public debate rather than a real problem in the field of economics.

'New knowledge about individual motivation is something that will be taken more seriously,' says the researcher.

This article is taken from the English version of NHH Bulletin for 2012.