Watch Out for Brain Bubbles

Naomi Klein has a piece in today's Washington Post suggesting that we should get rid of Larry Summers as an economic guru (in the Obama administration). I don't know that I would agree with her criticism of Summers. I rather hope that Obama brings as many smart people to the table to deal with this crisis as possible. But I think her argument is fascinating.

And this brings us to a central and often overlooked cause of the global financial crisis: Brain Bubbles. This is the process wherein the intelligence of an inarguably intelligent person is inflated and valued beyond all reason, creating a dangerous accumulation of unhedged risk. Larry Summers is the biggest Brain Bubble we've got.

Brain Bubbles start with an innocuous "whiz kid" moniker in undergrad, which later escalates to "wunderkind." Next comes the requisite foray as an economic adviser to a small crisis-wracked country, where the kid is declared a "savior." By 30, our Bubble Boy is tenured and officially a "genius." By 40, he's a "guru," by 50 an "oracle." After a few drinks: "messiah."

The superhuman powers bestowed upon these men -- and yes, they are all men -- shield them from the scrutiny that might have prevented the current crisis. Alan Greenspan's Brain Bubble allowed him to put the economy at great risk: When he made no sense, people assumed that it was their own fault. Brain Bubbles also formed the key argument Greenspan and Summers used to explain why lawmakers couldn't regulate the derivatives market: The wizards on Wall Street were too brilliant, their models too complex, for mere mortals to understand.

I think she is has a good metaphor. The excessive prestige we assign/allocate to some people is comparable to the excessive faith we give to some stocks and investments. Both are the result from a failure of social construction of reality, and in both cases the fault stems from a willingness to go with the herd rather than think with independent skepticism.

Of course we make better, more rational decisions is we refrain from ascribing too much credibility to a famous "talking hear," even a very good one.