Monday, December 6, 2010

How Well Calibrated is the Bernank?

A Zero Hedge article criticizing Ben Bernanke's claim that he is "one hundred percent" confident in his ability to control the outcome of quantitative easing raises the question: how well calibrated is the Bernank?

Making assessments of probabilities is a key function in decision making. Good probability assessments are "well calibrated," meaning that if a proportion of events is judged to have a certain probability (e.g. 90%), then the fraction that actually occurs is equal to that probability. So, if you made 10 judgments, each with 90% probability, then if you were well calibrated you would expect to make only one mistake.

Behavioral economics research indicates that the vast majority of people are overconfident about their judgments. They assign probabilities to events that are larger than the actual proportion of those events that end up happening.

So, if the Bernank is honestly "one hundred percent" confident, then he is probably poorly calibrated and overconfident.

Of course, if he is just lying (as his shaky voice would indicate) then he may be well calibrated but just a liar. An amusing comment from the Zero Hedge peanut gallery may help shed some light:

Could you see the famous poker "tell" when he answered the 100% question that his pulse raced and he swallowed hard? He knew it was time to put it all on the line, yet he's not a public speaker so the flaws show.
We all remember the Bernank's quote from March 28th, 2007: “At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”

In yesterday's post, I looked back on my contemporaneous, pre-crisis predictions, so I won't bore everyone with those again.

Suffice to say, even the milquetoast Calculated Risk blog is sharply critical of the Bernank's track record.

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