Amar Bhidé: In Defense of Human Judgment

A Call to Restore the Primacy of Judgment Over Mathematical Models in Finance and Regulation

In a recent highly publicized game of Jeopardy, two of the game’s greatest past champions were beat by Watson, an IBM computer whose intelligence was based on algorithms. It was hailed as the latest example of how software could outperform human beings.

In the latest INET interview, Amar Bhidé, the author of the new book A Call for Judgment, counters that argument with a strong defense of the primacy of human judgment – at least when it comes to overseeing the economy and navigating the world of finance.

The Professor of International Business at the Fletcher School of Law and Diplomacy criticizes the tendency in many quarters to rely on mathematical models to inform investment decisions. It’s that overreliance on models that tend to generalize and simplify that helped drive the world into the global financial crash of 2008 and the ensuing Great Recession. Bhidé makes a strong case that human actors need to immerse in the details of individual cases and weigh many different factors to come up with tailored decisions that more closely apply to the complexities of the real world.
Bhide also argues that regulators need to take a similarly human-centered approach.

Unfortunately, many of today’s regulators came up through the same academic economic departments that stressed the mathematical model approach and so they were drawn into the same mistaken analysis that led to the crisis.

You can watch a full version of the interview on video or watch individual segments on different ideas. We also invite you to go to the Q&A Forum to give your own answers to the related question:

What is the right balance between using human judgment and relying on mathematical models in regulating finance and the economy?

 

Comments

Submitted by Val Samonis on Tue, 04/05/2011 - 10:43am.
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There is no simple answer to this question but the growing area of intergrative Knowledge Management should offer the key to the most important parts of the  answer. More later, after the Bretton Woods Conference.

Submitted by Quentin on Sun, 04/24/2011 - 4:23am.
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Well, at least we have the knowledge that we are humans and we can shut off the computer and pretty much make it do what we want. The software might be smarter but it was humans who made it that way.

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    Placer un pari dans ce casino en ligne n'est pas difficile si vous savez dans quels jeux de casino vous souhaitez miser et exercer vos talents de joueur.

Submitted by Val Samonis on Thu, 04/28/2011 - 5:11pm.
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Software will never be smarter; precisely therefore we will need human judgement forever even though the nature of that needed human judgement will be constantly changing.

Submitted by Michael Harrington on Sat, 05/14/2011 - 7:51pm.
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Amar Bhide is exactly right - uncertainty defines the nature of our world. That nature holds both the promise and the risk of change. Our economic and financial institutions should be designed to help us manage this uncertainty, as informed by the loss aversion that defines economic preferences.

Risk is managed by diversification across independent events as suggested by insurance pooling, but this requires we manage the associated moral hazards of asymmetric information. For this reason, self-insurance and monitoring by private insurance are preferable to social insurance. Our public policies should empower citizens to accumulate and diversify asset portfolios, ensure viable and competitive private insurance markets, and, as a last resort, be complemented by actuarially sound social insurance systems. This will provide the most efficient means to manage the uncertainty of the market economy in a free society.

Submitted by Nick Albertini on Tue, 05/17/2011 - 4:28pm.
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I strongly disagree.  I would appear that everyone here is quite ill-informed with regard to the progress that has been made in AI.  It is a very short matter of time until we have computers that are smarter than us.  The DARPA SyNAPSE project, for example, has already moved into the production phase for memristor based neural networks.  The era of human judgment is at its very end right now.  I do agree, however, that if we keep using linear models, it will likely end in disaster.  Non-linear modeling is the way to go and these new non-linear computers will be able to handle it.  What is a human supposed to do, guess?  Our current economic system is far too complex for any human to be able to guess well.  We have innovated ourselves into this mess.  It is time to innovate ourselves out of it.  http://www.facebook.com/GPSTG

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