Shiller: When to ignore an expert

Private equity investor Stephen Schwarzman (who co-founded Blackstone Group) lectured in Robert Shiller’s Spring 2008 “Financial Markets” course. During the following lecture, Prof. Shiller politely suggested Schwarzman had spoken above his pay grade (or, more accurately, beyond his expertise) in falsely proclaiming what a wonderful time it was to buy distressed assets because the economy would soon be healthy again.

Prof. Shiller’s comment is something everyone should remember whenever listening to any “expert”:

[Steve Schwarzman] said very confidently… that this current financial crisis ought to be over in a year and that… investing in distressed securities now is an opportunity because, I think he pointed out, AAA mortgage securities are selling for 80-some cents on the dollar and it can’t be that bad. Well, this is the same theme that we got from [Yale endowment asset manager] David Swensen and I’ve heard it from others, that that’s the opportunity now.

When I hear Steve Schwartzman proclaiming that he thinks this… business crisis will be over before long, it made me wonder: Do I know more than he does about that sort of thing? Because I don’t think it’s going to be over soon.

Then it gets back to — I think — you have to put all these people in perspective. There’s so many different kinds of expertise. And when you listen to someone, you always have to ask, “Well, what does he or she know that is specific to their expertise?” And I don’t think Schwartzman is a macroeconomist. So, I don’t want to say he’s wrong, but… he might be wrong.

With a year’s hindsight, Shiller was obviously right and Schwarzman dead wrong. What’s interesting is that Shiller KNEW Schwarzman was wrong a year ago. That’s why it’s so valuable to listen to true experts on matters about which they are true experts.

Posted by James on Monday, April 20, 2009